Goldman Sachs estimates Janet Yellen has two more weeks before running out of cash

Speaking to Bloomberg Television on Friday, the chief political economist of Goldman Sachs said Treasury secretary Janet Yellen’s prediction of June 1 as the “X-date” when the government runs out of enough cash to pay all of its bills was likely a conservative estimate, and there was in fact more cushion.  

“Our guess right now is that the real deadline is probably more like June 8th, 9th—that’s when they’re at the greatest risk,” said Alec Phillips. 

Biden and McCarthy are set to meet on Monday for talks to break through the current impasse, amid signs bondholders are already pricing in the low but increasing possibility of a potential default.

Fixed income strategists at Canada’s TD Securities, for example, argued that one-year U.S. credit default swaps, essentially a form of insurance for debt holders, are trading near record levels. Moreover, the spread between yields on those short-term Treasury bills maturing before June 1 versus those afterwards are blowing out in a sign investors are demanding higher premiums for the additional risk.

Interests favor brinkmanship to the last possible moment

High-stakes deals like this one are rarely reached before the pressure of an oncoming deadline helps focus minds and opens up room for new and mutually acceptable solutions. The fear is, however, that the Republicans have every reason to hold firm ahead of next year’s all-important presidential election.

For one thing, Speaker McCarthy has little maneuvering room within his party to negotiate a deal: In order to get elected to the third-highest-ranking office in the country after 14 previous failed attempts, he agreed to a key rule change that undermines his negotiating mandate.

If so much as one single solitary lawmaker wants to oust McCarthy as speaker, they can force a vote of no confidence on the House floor.

And earlier this month, the leading candidate for the Republican nomination all but ordered McCarthy’s troops not to back down, calculating that the Democrats would “absolutely cave.”

The U.S. has kept its financial commitments since 1789 by paying its bills on time. Congress has prevented default 78 times. It’s essential they do so again. pic.twitter.com/azPjhFdUry

— Secretary Janet Yellen (@SecYellen) May 22, 2023

“I say to the Republicans out there—Congressmen and Senators—if they don’t give you massive cuts, you’re going to have to do a default,” ex-President Donald Trump said during a CNN town hall, arguing the party had little to lose with him out of the White House. 

A default under Biden that results in a financial crisis would hurt the entire country, but would likely prove far more damaging to the incumbent than to any one Republican serving in Congress. 

That gives the GOP motive to engage in brinkmanship as it eyes a potential win-win scenario: Either it succeeds in getting the Democrats to back down and accept their full demands, or Biden’s party takes the blame for a historic default.

Invoking the 14th Amendment may not help in time

Looking for bargaining leverage in the face of a potentially implacable opponent, a number of Democratic lawmakers are therefore arguing the President should resort to a controversial break-the-glass option.

Section 4 of the 14th Amendment stipulates the “validity of the public debt, authorized by law…shall not be questioned,” which could provide legal pretext for raising the debt ceiling unilaterally without the approval of Congress.

Speaking in at the G-7 conference of leading industrial nations in Hiroshima, Biden said he believed his administration had the authority to do so if necessary. But that may not help, as it could get challenged and held up in the courts.

“The question is, could it be done and invoked in time that it would not be appealed, and as a consequence past the date in question and still default on the debt,” he said. “That is a question that I think is unresolved.”

Goldman Sachs’ Philipps nonetheless expects a deal will likely be reached and is more concerned about the effect of a U.S. Treasury—starved of cash—flooding the market with $500–$600 billion in new debt issues that may siphon private capital away from investment into the real economy. 

“The reality is Congress is going to have to do this at some point very soon and they should just go ahead and do it,” he explained. “Waiting until the last minute isn’t necessarily the right move.”