After the recurring comedy with the prospects of a historic US default, a drama with consequences and new challenges will follow.
Many analysts and financial experts say that legislators will eventually come to an agreement that will likely prevent a devastating default on debts. But that doesn't mean the economy will emerge unscathed.
The Treasury will have to try to replenish its dwindling cash buffer to maintain its ability to meet its obligations through the flow of treasury bill sales. The surge in supply, which is estimated at over $1 trillion by the end of the third quarter, will quickly drain liquidity from the banking sector, raise short-term financing rates, and tighten the screws in the US economy, which is on the verge of a recession.
Bank of America Corp. says this will have the same economic effect as a quarter-point rate hike. The high cost of borrowing has already affected some firms and is slowly restraining economic growth due to the most aggressive tightening cycle by the Federal Reserve in decades.
Against this backdrop, the dollar index continues to strengthen:
After a debt-cap resolution, the US cash stockpile (the Treasury General Account) should soar to $550 billion as of the end of June from the current level of about $95 billion — and hit $600 billion three months later, according to the department's most recent estimates.
