Will the debt ceiling clock go to zero? Photo by Alex Wong/Getty Images.
The clock’s a-ticking, and Washington is still chasing its tail over the debt ceiling. Midday Friday, Congress and the White House seemed kinda sorta maybe near a deal on a six-week can-kick. Friday afternoon, the deal was DOA, but everyone was still talking. By Monday morning, though, they weren’t. But then they were! Meanwhile, headlines resumed blaring about impending defaultageddonpocalypse. Markets falling! Banks dumping T-bills! Weimar Germany, Bolshevik Russia, Greece and Argentina redux! All of which the facts suggest are largely just noise, in our view. The risks of default and economic doom aren’t any higher today than they were last week—investors needn’t panic.
Most of the hype seems to stem from Congress’s failure to compromise this weekend. Which seems a mite odd. We’re still three-ish days from exhausting extraordinary measures the Treasury is using to buy debt ceiling wiggle room—an eternity! Twenty-one days in dog years, which most people would agree is analogous for politicians (apologies to our canine friends). Is anyone really surprised they haven’t hammered this out yet? The current crop of lawmakers is already one of the most feckless of all time. The real shock would have been a weekend deal! That they’re still squabbling well before 11:59 PM Wednesday is right on schedule.
At the moment, squabbling seems centered on the sequester—those “automatic” budget cuts that kicked in March 1—incidentally, a legacy of 2011’s debt ceiling can-kick. It seems the Senate is trying to use the government shutdown and debt ceiling as leverage to do away with the cuts (which, from next year, aren’t even real cuts—just slower-than-planned spending increases). One weekend proposal would reopen the government through March and suspend the ceiling until the end of January, but it kept the sequester alive, so Senate leaders declined. They fear any deal allowing the 2014 “cuts” to phase in as scheduled on January 15 would leave little chance of negotiating them away.
So all eyes turned to the White House, where President Obama planned to meet congressional leaders at high noon Monday—presumably to reiterate the importance of compromise, but we’ll never know since he cancelled to give the Senate time to discuss a purported deal. Deal to what? Who knows. Probably delay something, “fix” another thing, draw a line in the sand and lob it to the House. Who’ll then cross the line, draw a new one, “fix” something else, kick a can and then toss it back. We’d suggest not getting hung up on details for now—they change by the minute. You’ll get dizzy.
Heck, even in the slightly less near term, nothing much is certain. Sure, they’re overwhelmingly likely to compromise at some point, whether 11:55 PM Wednesday, in the wee hours Thursday morning, next Tuesday or whenever. But the specifics are anyone’s guess. Maybe they’ll duct tape the shutdown to the ceiling and kick the can on both. Maybe they’ll address one but not the other. Maybe they’ll hold hands, sing “Kumbaya,” abolish the debt ceiling and pass the world’s most perfect budget. You never know.
In the meantime, this you do know: We won’t default. Ratings agencies know it—they’re pretty much yawning at this charade. Even the articles proclaiming default market meltdown admit this if you read far enough. Default refers only to missing bond payments—interest or principal. Principal is covered, since the Treasury is permitted to roll over maturing debt. So all those short-term T-bills banks are “dumping” will get repaid—the Treasury need only issue a new bill for each one maturing. (And might we point out there was a buyer on the other side of every transaction.) With fear running high, the Treasury might have to issue replacement notes at a slightly larger discount, but investors, banks, sovereigns and money market fund managers globally will keep buying them. And as for federal interest payments, cash on hand and tax revenue far exceed the payout.
Don’t take our word for it? Take the market’s. If the US were spiraling toward a major event that would cause an economic catastrophe, markets would tell us. They’re pretty good at it. Even after an uptick in recent days, 10-year Treasury yields are 30 bps under their relative peak on September 5. The S&P 500 rose Monday, closing about 1% below its all-time high. Volatility has risen a tad lately—natural when markets are dealing with investors’ emotions—but markets would look far different if doomsday were nigh.
Our suggestion: Don’t sweat the political theatrics. Life’s too short. Just think a bit longer term. At some point, they’ll reopen the government and raise the debt ceiling for the 108th time, leaving everyone wondering just what all the fuss was about.