A debt ceiling tug-of-war isn’t going to cause US default. But the debt will if the US élite refuses to take it seriously.
OK, you are a powerful American and you have two choices: you can either refuse to raise the debt ceiling and refuse to cut Federal programmes – thus causing the US to default, and creating world-wide panic that destroys the professional lives of you and all your hundreds of thousands of cronies. Or you can do a deal to cut some programmes and raise the debt ceiling some way. Now there are millions of us around the world who would just love to see the former happen, because then it would become abundantly clear even to a Peruvian pipe player what a gigantic, pointless mess the whole global financial system is….and why we probably need to shoot everyone implicated in it. But anyone with a brain cell knows that a member of the US élite would no more do such a thing than give all his money to the Glaser family for safe keeping.
Unless some idiotic accident (which I confess I can’t imagine) trips the wire before anyone spots it, the US is not going to default. The Federal Treasury didn’t cough up $300 billion of capital for the nation’s banks – nor indeed the U.S. Treasury pump $3 trillion into the financial system – just to let a bunch of muddled GOP headcases and liberal denialists knock it all over for the sake of an arbitrary ceiling height. No way. What this second crisis in a year spells out in 5000 pt bold type along the pavements of Wailing Wall Street is that either America gets its debt and expenditure way, way down….or it will default at some point down the line – as in, when borrowing rates rise, as of course they must.
Now, the US can’t do that and keep the economy, welfare, health and defence supported, or else the economy for one will be down there with Greece within half a decade. So the American financial, economic and governing élite has a big problem involving enormous pain – and certainly, the end of the economic model it’s using at the moment. That’s what this ‘default crisis’ is all about. It’s no more a crisis than Iraq or Syria were crises; it’s a combination of neutered Republicans and financial lunatics trying to put off the Day of Reckoning on money-creation….just as Middle Eastern crises are trying to put off the day when oil simply isn’t viable as an energy form any more.
All this sounds well radical an’ that man, but I confess yesterday to reading the financial press and laughing until I was about to do myself an injury, or make an awful mess on the floor. The people that write this stuff are either monkeys of the kind NASA used to put into space capsules, or All Part of the Plan. Given the unconsciously hilarious way in which they write, my hunch is that it has to be the former.
Talking of the scale of disaster that would follow a US default, Tim Bitsberger, a former Treasury official under George Dubya observed, ““If we miss an interest payment, that would blow Lehman out of the water. Lehman was an isolated company, and now we are talking about the U.S. government.” No shit, Tim? Wow. That’s big.
Morgan Stanley CEO James Gorman urged employees to contact their congressmen to remind them about the “unacceptable consequences” of a default. Well, if the Gorman from Morgan thinks the gargoyles have forgotten, then kiss your ass goodbye.
But the hysteria got worse as the day progressed. “It would be like nuclear bombs, basically too horrible to use,” said Warren Buffett. Kind of makes you wonder, in that case, why the US spent (in the 2012 budget approved by the Senate Appropriations Committee and supported by the White House) around $630 billion on maintaining and modernising stuff that’s too horrible to use. Is that like too big to fail? Either way, every year the US whacks into just nuclear weaponry twice what it cost to bail out its banking system in the 2009 – 11 period. That’s feels to me like a priority in need of interrogation.
But if the too-horrible-to- think-about thing happened, then Treasuries might no longer be eligible as collateral for repo agreements, said James Kochan of Wells Fargo. Mr Kochan added “Holy cripes!” to emphasise that this would be bigger than 200 Nagasaki bombs dropped on Fukushima. But top gong of the day goes to Scott Skyrm, former head of repo and money markets for Newedge, who told Bloomberg that such a knock-on effect would mean there being “no upside to being in the market in that environment”, easily the longest way of saying “The End” yet recorded.
So it was left to a Brit, WPP Chairman Sir Martin Sorrell, to say something understatedly irrelevant: “The impact on Brand America is not good at all.” Well, it’s not good at all if you imagine for a second that any of this is to do with intransigent incompetence. But not being of that view, I diametrically disagree with what Sorrell said: the impact on Brand America is extremely healthy, because what this serial-ceiling drama highlights to market experts is (a) America is living way beyond its means and faces some tough budget choices right now; and (b) showboating or not, the time for even American denial of financial-interconnection lunacy is running out.
The choice is now very clear indeed: either do something about both debt and deficit, or face disastrously rising borrowing costs in the medium-term future – perhaps even sooner. The specialist media give out scarey quotes prompted no doubt by Goldman Sachs spin-doctors….who don’t for obvious reasons, want the drunken buggery party in Sodom to end. But end it must.
This isn’t about the US defaulting now by being silly. It’s about America being doomed to do that unless it faces reality. 2016 Presidential candidates take careful note.