Welcome to the Weekly Scan. Here’s what we’re following for the week of September 27, 2021.
Debts are due. Treasury Secretary Janet Yellen reportedly reached out to Wall Street titans last week for help, as she attempts to suspend the debt ceiling, which is the federal government’s borrowing limit. Without the suspension, the federal government will run out of money by the middle of October, which could trigger a wider economic crisis. Congress sets the debt ceiling, which is funded through the sale of Treasury bills. Although Democrats in the House passed a stopgap spending bill last week that would suspend the country’s debt ceiling until December 2022 and keep the government open, Republicans in the Senate have said they’re not interested.
- The takeaway: Since the beginning of the pandemic, the federal government has embarked on ambitious plans to assist the economy that require trillions of dollars worth of new spending. If Congress fails to raise the debt ceiling, the government would be forced to default, which could affect millions of Americans and could cause a historic financial crisis, according to Yellen. In 2011, when Congress refused to increase the debt ceiling and came close to defaulting on its loans, it led to a downgrading of U.S. debt for the first time in its history. Currently, the debt ceiling stands at $28.5 trillion. Congress last suspended the debt ceiling in 2019, and last raised it in 2017, adding $6.5 trillion to the previous $22 trillion limit.
Global contagion. Stock markets around the world tumbled last week, in reaction to difficulties in China, reminiscent of the failure of investment bank Lehman Brothers in 2009. The trouble started in Shenzhen, with a company called Evergrande, one of the largest real estate companies in the world. The company, which has 1,300 projects in 280 cities in China, owes roughly $300 billion in debt, and signaled to creditors it may default on its loans due to flagging sales. Evergrande is currently due to pay about $130 million in interest on various bonds this month. Both the Dow and S&P 500 fell roughly 2%, before regaining losses later in the week.
- The takeaway: In recent days, China has worked to contain fallout from Evergrande’s potential failure by pumping the equivalent of $71 billion into the nation’s banking system. The fallout could be limited because Evergrande’s stock is held mostly by mutual funds, ETFs, and some Chinese companies rather than banks or other financial institutions central to money supply and systems, according to Reuters.
Cereal surge. The cost of your morning Cheerios may be about to go up. General Mills, the maker of the cereal brand and other well-known consumer staples, said that it expects to increase the prices for many of its products. General Mills cited increases in the prices of raw ingredients, and a shortage of truck drivers, as two reasons for the price hikes.
- The takeaway: Throughout the pandemic, the prices of many consumer goods have ticked up, due to supply chain snags and unpredictable consumer demand. For September, the rate of inflation was about 5.3%, according to the Department of Labor, roughly three times the rate of inflation prior to the pandemic. Other food companies including Campbell Soup, Conagra Brands, and J.M. Smucker, have also recently lifted prices for many of their products.
Taper testing. In its most recent Federal Open Market Committee meeting on September 22, the Federal Reserve said it would end a bond-buying program begun last year to support the economy, while leaving interest rate unchanged until some time in 2022. The Fed has pumped trillions of dollars into the economy since March, 2020, to allay the damage from massive business closures and layoffs as the pandemic began. Some 15 million people lost jobs in the first few months as Covid-19 spread, and as businesses shut their doors and the global economy ground to a halt.
- The takeaway: To ease the financial pain caused by the pandemic, the Fed borrowed a page from its 2008-2009 financial crisis playbook. Using a tactic called quantitative easing, the Fed’s approach was two-fold. It lowered interest rates to near 0%, and ensured markets and the financial system stayed liquid by purchasing more than a trillion dollars worth of treasury and mortgage bonds, among other things. Financial experts say it will be an important test to see if the economy can continue growing without massive federal support. However, there’s a downside for consumers. As interest rates begin to rise, the cost to borrow are likely to go up, for things like credit card spending and mortgages, which have been at record lows.
Here’s what we covered in last week’s Scan:
- Retail sales increased in August, beating expectations.
- DoorDash is suing New York City.
- The U.S. and the U.K. made a deal with Australia, stepping on France’s toes.
- Apple announced its next product lineup.