u.s. gov't shutdown? debt-ceiling showdown

[jk]

i thought we might want to start discussing the debt ceiling issue, and what might happen in the absence of an agreement.

fwiw:

i think what's going on in minnesota is instructive. the state gov't is shut down for the most part, except for emergency services, and looks to stay that way for some time. do you think this bothers the republican legislators? or do they think, perhaps, that this is what they'd like to make permanent.

i think there's a good chance that there will not be an agreement in washington and that there will be a government shut-down. eric cantor walked out on biden because, as the tea party darling, and as only the 2nd in command of the republican caucus, he could not and would not agree to any revenue increases. by doing so, he also set up boehner to be the one to "give in" on revenues, thus enhancing his own chances of displacing boehner as leader/speaker. also, we can see cantor and biden bowing out to let the principles - obama and boehner- cut the deal.

obama has been very weak in all his prior negotiations with the republicans, and it is possible that he will just give in to them. otoh, he knows that clinton "won" in public opinion when gingrich shut down the government. also, with 2012 coming into view, he may feel that he has to re-establish his bona fides with the democratic activist base. so it is possible he'll hold out tor a revenue increase.

boehner, otoh, may feel that he can't cross the line in the sand for fear of alienating the tea-party/right-wing base - this both protects his personal position as house republican leader and re-inforces the ideological theme for next year's election.

how do you think the markets would react to a shut-down and default? one of the ratings services [moody's?] said they'd immediately downgrade u.s. debt to d. there are a lot of funds with mandates requiring that they sell their holdings on such a downgrade. so that would push rates up sharply. otoh, there are pension funds with required duration matching which would probably be happy to buy treasuries at higher rates of return. also, there will be a shortage of treasury paper in such a scenario. those factors would tend to support bonds and keep rates low. i think the selling would outweigh the buying overall, and rates go up. otoh [are we up to 3 hands?], the fed might feel compelled to enter the market and keep rates contained. qe3 might be launched on a default.

i think gold would benefit as more governmental dysfunction points to systemic instability. i think equities would sell-off, especially if medium to long-term rates jump. what happens to the dollar and bonds longer-term might be interesting as e.g. the chinese and the saudis and other big holders of dollars and bonds think through what's happening in the american political system.

[globaleconomicollaps]

Re: u.s. gov't shutdown? debt-ceiling showdown

There have been more than 70 (seventy) battles over the debt ceiling. The last time there was a government shutdown was for one day in 1995. It is unlikely that either side will actually "play chicken" with their livelihoods and sink the ship of state. Much more likely that they will both find a way to claim victory. This is an article by Krasting, who finds it much more likely that a selective policy of inflation will be used to reduce the outlays for social security and gov. retirement funds.

http://brucekrasting.blogspot.com/20...icans-and.html

Obama, Democrats, Republicans AND Bernanke All in a Bind – What they will do and when
We have two distinct groups in D.C. that are stuck between a very big rock and a hard place. The first is the Federal Reserve. The second is the Democrats and Republicans and the battle being waged over the debt limit. I see a possible solution to these impasses. It’s so simple that I’m sure it is being considered. The prospect is scaring the crap out of me however.

The Fed is in a bind. The economy is clearly slowing down again. Unemployment will soon follow. According to the Fed’s Dual Mandate they should be doing something about that.

They have few options. They can’t do more Large Scale Asset Purchases (“LSAP”). What has become referred to as “QE”, has not worked. It was also very unpopular (both in and out of the country). LSAPs may come back sometime, but they are on the shelf for at least a year. What could the Fed do in the near future?

I) They could increase the inflation target (core CPI) from “A little under 2%” to “A tad over 3%”.

II) They could alter the ZIRP (zero interest rates) language from: “For the foreseeable future” to: “Until such time as the Fed’s new inflation target has been achieved but not less than one year”.


These relatively minor changes would have very dramatic effects.

-Inflationary expectations would jump. Actual inflation would follow.

-The dollar would crap out. Exports would increase.

-This would result in wage pressure. Exactly what the Fed wants.

-The resulting inflation in all commodities would roll into new home construction costs and therefore be a boost to existing values. (Soft bailout to housing/lenders)

-It is (short-term) supportive of equities. Exactly what the Fed wants.

-Debt costs can’t rise too fast as ZIRP keeps the belly of the curve cheap. This has to happen. Without LSAPs, this is the only way to achieve it.


Are you scared yet? Now consider where the politicians are on the inflation story.

Republicans have drawn a line in the sand on the debt limit with their position of “No New Taxes”. The Democrats have said pretty much the opposite with, “No spending cuts”.

Neither side appears to be giving an inch. There is no common ground. Yet, to go to August 2 without a resolution is just a dumb move. Both sides of this big debate know that the next presidential election is riding on the outcome. If the US is to default; one side or the other will shoulder the blame. The “side” that gets the blame will lose the election. And both sides understand this. So where’s the compromise?

The solution is inflation. The government has got to get out of its inflation indexed obligations. You don’t have to raise tax brackets to raise revenues or cut expenses. You can mess with inflation adjustments to achieve these ends. Both sides can appear to win if this is accomplished.

Consider the words last week of Brian Graff of ASPPA (Lobby for pensions and actuaries) (The conference was sponsored by the IRS!!)

"Eliminating indexing is one of the proposals receiving serious consideration as Congress enters “uncharted territory” with legislation to raise the debt ceiling, If Congress were to stop indexing for a period of time, which would affect tax brackets, individual retirement account contributions, and contribution limits under tax code Section 415, “you could raise a lot of money, and those are the kinds of things they are talking about.”


On the expense side of the equation a great deal of fat can be cut by eliminating/cutting COLA increases in a variety of programs. The most important of which would be Social Security. Depending on how the cuts in COLA are defined and how they are applied a huge amount of money would be saved over an extended period.

If all social obligations had their COLA increases cut in half it would (on paper) put the US on a much more solid long-term footing. It is a very appealing “kick the can down the road” approach. No cuts in programs (just smaller increases) and no new taxes (but higher revenue as the inflation adjustments for AMT and other tax issues kick in).

If you buy into this thinking this is they way it could play out:

We DO go to the 11th hour on the debt limit. But a compromised is reached. Central to the deal is a broad restructuring of the way inflation impacts both revenue and expenses at the federal level. Both sides claim victory.

Two months later Bernanke will announce what will be called QE3. He will make a long-term commitment (at least one year) to maintaining interest rates at near zero levels. And he will raise the inflation target that the Fed is hoping to achieve by 35% ('smidge' over 3% core CPI)

Should things play out along these lines it will be sea change series of events. If anything like this were to be in our future the very worst financial position would be short gold and long bonds. Being short volatility in any market would also be a mistake. Outside of that, I’m not sure where/how to position for this.

My thoughts:

Deflation is scaring us to death. But inflation will kill us. And that is exactly what the ‘Deciders’ have in store for us.

[Mega]

Re: u.s. gov't shutdown? debt-ceiling showdown

http://www.bloomberg.com/news/2011-0...rnyn-says.html

They going to PRINT!

[FondoFinder]

Re: u.s. gov't shutdown? debt-ceiling showdown

Here is an article suggesting an 11th hour solution, as has happened many times before as the debt ceiling has been raised 78 times. I think a 95% chance of a deal because both sides know a D rating would be catastrophic. What the markets do in the meantime I think may be a teeter-totter based on earnings and other economic news. I will watch out for a Hindenberg Omen, or an obvious bearish chart pattern before selling off.

[flintlock]

Re: u.s. gov't shutdown? debt-ceiling showdown

http://www.bloomberg.com/news/2011-0...rnyn-says.html

They going to PRINT!

Yeah, I'd say we are definitely about to enter the early days of heavy "printing" . Things may happen faster than anticipated. Nothing I've read shows any sign of a serious attempt to cut back expenditures. Not that I believe that would work anyway.

What happens if they DO work out an agreement? Another round of QE? Then what? Has anyone worked the whole thing through? If so, how soon does this all happen? 1 year? 10 years? 50? I'd love to read some thoughtful scenarios. Something besides "run for the hills" or "zombie apocalypse". I don't rule those out, just would like to consider a better option. What is the historical precedent here? Weimar Germany or what?

[thunderdownunder]

Re: u.s. gov't shutdown? debt-ceiling showdown

What can I say - you tax too little and you talk to much. Its a given - you can raise it because you can.
" It may be their Currency but it is our problem" I think a Google is in order???? don't you?.
or for a little of Australian wisdom.....
"In the race of life always back the Horse named "Self Interest" after all it will be the only one trying"----- (and It has never lost yet!)

[metalman]

Re: u.s. gov't shutdown? debt-ceiling showdown

ej sez... 'no chance of shutwodn & usa default'

http://www.itulip.com/forums/showthr...iling-deadline

[jk]

Re: u.s. gov't shutdown? debt-ceiling showdown

ej sez... 'no chance of shutwodn & usa default'

http://www.itulip.com/forums/showthr...iling-deadline

i think ej has a higher opinion of our politicians than i do: i think they may be even more irresponsible and foolish than he gives them "credit" for.

[we_are_toast]

Re: u.s. gov't shutdown? debt-ceiling showdown

i think ej has a higher opinion of our politicians than i do: i think they may be even more irresponsible and foolish than he gives them "credit" for.

I think the Republicans would push it all the way to default. At this point, they are in full scorched earth, Econo suicide bomber mode. But I think you may be underestimating the gutlessness of the Democrats, and especially the capitulator-in-chief. I think the only question is, when will the the great capitulater, capitulate? At first I thought it would go down to the wire, very near Aug. 2nd. But there are signs that the capitulation might take place within the next couple of weeks. Krugman has said that this capitulation would pretty much spell the end of the Obama presidency, and I tend to agree. I have added to my short the market allocation as a hedge if I'm wrong, but I'll be looking to dump it quickly when the deal is close.

I expect that following the austerity path of Ireland and Greece will yield the same results they are currently experiencing.

[lektrode]

Re: u.s. gov't shutdown? debt-ceiling showdown

...
I expect that following the austerity path of Ireland and Greece will yield the same results they are currently experiencing.

it may be the only way out?
altho letting the whole charade collapse wouldnt be any worse, would it?
considering whats likely to occur either way, IMHO, letting wall st's house of cards burn might be preferable...
they should at the very least have to suffer the 'haircut' that GM's bond holders got, never mind what happened to 401k's etc

[sishya]

Re: u.s. gov't shutdown? debt-ceiling showdown

If debt ceiling is not raised, dollar will slide(or collapse) so much fast.
if US cannot pay it's debts back in diluted more debts, foreigners will not even get that coupon and exit enmasse.
things will get ugly if it happens(like Argentina, Russia...)

I don't think both parties will ever let this happen.

[charliebrown]

Re: u.s. gov't shutdown? debt-ceiling showdown

isnt this a pay-me-now or pay-me-later situation? If the likely outcome is raise the debt ceiling by 2-3T, and offer some phony spending cuts, then default looms even larger in 5 - 10 years. Right? Is it better to let the house collapse now rather than destroy even more capital later?

Of course with our legislators only being able to see to the next election. Option A raise with phony cuts is the most likely option.

[c1ue]

Re: u.s. gov't shutdown? debt-ceiling showdown

i think what's going on in minnesota is instructive. the state gov't is shut down for the most part, except for emergency services, and looks to stay that way for some time. do you think this bothers the republican legislators? or do they think, perhaps, that this is what they'd like to make permanent.

Minnesota doesn't issue Treasury bonds, nor does the dollar hinge on Minnesota.

A federal government shutdown would hit the banksters right where it hurts, and that cannot be permitted.

Moreover a federal government shutdown drags the can right to the forefront - and which politician on either side wants that?

There will be gamesmanship, but the debt ceiling will be raised.

[flintlock]

Re: u.s. gov't shutdown? debt-ceiling showdown

isnt this a pay-me-now or pay-me-later situation? If the likely outcome is raise the debt ceiling by 2-3T, and offer some phony spending cuts, then default looms even larger in 5 - 10 years. Right? Is it better to let the house collapse now rather than destroy even more capital later?

Of course with our legislators only being able to see to the next election. Option A raise with phony cuts is the most likely option.

That's my vote for most likely outcome also. But eventually of course, even if farther down the road, things just get worse as entitlements and corresponding higher taxes spiral out of control. Never before has so much been promised to so many, with so little ability to pay for it. This will not end well, no sir. Not unless an effort is made to prop up employment. The irony is, as the US becomes less competitive, companies look for ways to replace workers, not add them. Fueling the unemployment vicious cycle. A combination of outsourcing, loose immigration, and better technology will guarantee a permanent unemployed dependent class. Which history tells us will eventually upset the apple cart if not placated.

Nations that don't take care of their poor end up with a huge advantage in this global economy. They reap the rewards without any of the costs. If some sort of level playing field is not required in this regard, any hope of a way out of this becomes impossible.

[dcarrigg]

Re: u.s. gov't shutdown? debt-ceiling showdown

I think the Republicans would push it all the way to default. At this point, they are in full scorched earth, Econo suicide bomber mode. But I think you may be underestimating the gutlessness of the Democrats, and especially the capitulator-in-chief. I think the only question is, when will the the great capitulater, capitulate? At first I thought it would go down to the wire, very near Aug. 2nd. But there are signs that the capitulation might take place within the next couple of weeks. Krugman has said that this capitulation would pretty much spell the end of the Obama presidency, and I tend to agree. I have added to my short the market allocation as a hedge if I'm wrong, but I'll be looking to dump it quickly when the deal is close.

I expect that following the austerity path of Ireland and Greece will yield the same results they are currently experiencing.

Don't forget who butters their bread, errr, toast. I'd put the odds of a bi-partisan plan that works against the banks about even with the odds of a Cubs/Canucks combo victory next year.

I'm with EJ on this one - no default happens. It may go past Aug. 2nd, true enough, but the 'fantastic' Treasury leadership will 'find a way' to string it out through Sept. at the zero hour. The markets may rattle a bit, but I don't think it will be all it's cracked up to be.

I think you are right about the 'capitulator-in-chief,' though. Austerity's-a-commin'.