Last January we expressed some concern about the potential mischief that could arise when Congress had to get around to dealing with the debt ceiling. That was, what, six months ago? As anyone following recent developments in this area knows, this has not been going well. Through an interesting combination of Republican stupidity, mendacity and willful ignorance, Democratic miscalculation (mainly by Obama, driven by his need to prove he’s “bipartisan”), and Treasury sloppiness, we—that is, the United States of America—now face the prospect of defaulting on our debt, and losing our triple-A credit ratings, if there is no agreement to raise the federal debt ceiling. Now, what are the odds of these two events? Default? Frankly, not likely. As Paul Craig Roberts (hardly a raging leftie) has stated:
The US government will never default on its bonds, because the bonds, unlike those of Greece, Spain, and Ireland, are payable in its own currency. Regardless of whether the debt ceiling is raised, the Federal Reserve will continue to purchase the Treasury’s debt. If Goldman Sachs is too big to fail, then so is the US government.
That pretty much sums it up. And you can be damn sure that Treasury Secretary Geithner is making certain that, whatever else might not get paid in the event that there is no debt ceiling increase, US government bonds will be paid, no matter what.
The possible downgrade is a bit more serious. It’s good sport to knock the rating agencies, and they didn’t cover themselves with glory with their cavalier enabling of the whole CDO scam. But as a former Moody’s Industrial guy, let me put in a word for the agencies here.Yes, they screw up from tome to time (and in the CDO scam they screwed up big time). But on balance they provide a necessary service to capital markets. They’re impartial (that was their failing in the CDO mess—they let themselves get compromised.) And they’re generally right about credit trends. There’s are reason why they still command considerable respect in the markets, even though someone is always mad at them—and it’s related to the fact that someone is always mad at them. Investors are mad because agencies move too slowly. Issuers get mad because agencies move too precipitously. You can’t please everyone all the time, and rating agencies seem to do a pretty good job of not pleasing anyone at all.
It’s even more problematic for sovereign analysts—analysts who rate sovereign entities like countries, and supranational organizations like The World Bank. Because here the pressures are even more extreme. Some country doesn’t like its rating? The next thing you know, you’re getting a late night call from someone at the State Department wondering what the problem is, that sort of thing.
So imagine the poor guys whose job it is to pass judgment on the credit quality of the United States. Boy, talk about what used to be a cushy job. This was probably the easiest credit rating decision ever, for decades. The US was the gold standard, the one unimpeachable gem of credit quality in a world of shifting economic and political trends, some of which spanned decades. That poor guy down the hall has Argentina and Mexico—the guy across from you has Indonesia and Malaysia. You, on the other hand, just crunch out your ratios, knowing that they set the standard for everyone else.
And you know other stuff too, as does everyone—that it’s that triple-A rating that lets the US borrow however much it wants to, because it’s, frankly, cheaper for the US to borrow than it is for anyone else, except maybe for a couple of Scandinavian countries with populations the size of Newark, and Switzerland, and maybe Canada too. And that the entire global financial system takes its borrowing costs from the cost at which the US government borrows. That the US government debt rating underpins the ratings for thousands of municipalities, including the various states, as well as all sorts of other entities that borrow, like the quasi-government-owned banks that let farmers buy homes, that organization that guarantees student loans, those sorts of things. But you don’t ever need to think about this too deeply, because the United States would never, ever, ever get itself into a position where any of this might be questioned.
Except suddenly, whoa, you have a bunch of insane tea party Republicans running around Congress, and guess what? They don’t care if the United States defaults. In fact, many of them seem to think it’s a good idea. Some of them are even Presidential candidates who say they won’t vote to increase the debt limit, no matter what. They seem to believe that Social Security is causing the US to run too big a deficit, or something. You know, as do those who pay a modicum of attention, that government borrowing and Social Security don’t even belong in the same sentence—Social Security is self-funding, and is solvent for at least the next twenty-something years, and is easily tweaked to extend solvency further. These people in Congress, on the other hand, don’t seem to care about that, either. They don’t even care if they get their facts straight or not. But all of a sudden they’re in a position to hold the US government’s ratings hostage, for the sake of preventing America’s first black President from getting re-elected. Not that he’s been that great a president, but still.
So now you’ve got a problem. It looks as if the United States might become one of those countries that pop up from time to time, who decide, not that they can’t pay their debts—they just won‘t. Holy crap, what are these people thinking? You can’t actually put any of this in any sort of rating action justification, or press release or anything, but you’re gobsmacked, as the British say. These people are seriously jeopardizing the credit quality of the most financial sound country on earth, the one on which everyone else’s borrowing rate depends. And you’re supposed to opine on this in a dry professional manner. OK, you know, as does Paul Crag Roberts, that Geithner is not going to let a Treasury coupon or maturity go unpaid. But you also know that if the debt ceiling increase is not passed, Geithner is going to be facing some hard choices—do Social Security checks go out. What about paying the military? Or the border patrol? This is because all you can pay out on any given day is what’s coming in by way of tax receipts, and anything else that comes along—auctioning off speedboats of drug dealers, that sort of stuff.
So you’re in a bind. Because, without an agreement on raising the debt ceiling, there probably is stuff that won’t get paid—and does this still accord with a triple-A rating, where there should be no question whatsoever about everything getting paid. These are debts that the government has already incurred—this sn’t some future obligation. This is money the government owes now.
I have to say it’s kind of fun watching Roberts, former right wing poster boy, but one with a brain in his head, rail at those who want to cut back on Social Security and Medicare in the name of fiscal responsibility. But these are interesting times, and interesting times make for interesting bedfellows. Paul Krugman and Bruce Bartlett, for example. Bruce Bartlett, who we have referred to in the past approvingly, is, like Roberts, one of those conservatives driven round the bend by the Bush/Cheney Imperial Presidency. The fear of an over-powerful Washington should be uniting true conservatives and liberals, but too much stuff seems to be getting in the way. Elsewhere, Roberts has this to say:
However, regardless of whether the debt ceiling is raised, the US government is not going to go out of business. Why does anyone think that the President, who does not obey the War Powers Act, the Foreign Intelligence Surveillance Act, US and international laws against torture, or any of the laws and procedures that guard civil liberty, is going to feel compelled to obey the debt ceiling?
Funny he should mention that, since it’s been broached by a number of people, including Bruce Bartlett himself, that since the 14th Amendment says that the debt of the US government “shall not be questioned,” the debt ceiling is irrelevant. So Obama should just ignore it. The fact that this would undoubtedly lead immediately to Obama’s impeachment notwithstanding, it’s an interesting idea, and one that Obama may indeed be keeping in reserve.
Because it may be that he will need it. At present, we continue to see the two sides far apart. That is, Democrats have given into just about everything the Republicans have asked for, and Republicans still ask for more. Well, that’s to be expected. Yes, you know, if you’re that sovereign analyst pondering how you can change jobs quickly and hope that no one has noticed, that Obama has promised to give away the store, to the outright alarm of many Democrats in Congress, who thought they would be able to retake Congress next year on the back of the insane Ryan plan to eliminate Medicare that every single House Republican voted for. You also know that Obama did it because he thinks that’s what he needs to do to get re-elected. But you also know that the Republicans are going for broke—there are 80-90 republicans who will probably not vote to raise the debt ceiling under any circumstances. Which means, doing the math, the Speaker Boehner needs Democratic support to get any debt ceiling increase passed. And this will only happen if there’s something in there that will generate revenues, a prospect that a considerable portion of your own party has rejected. So we’re stuck.
Well, maybe the world will look different tomorrow, or you can request to take over the African countries so you can rate the next deal coming out of Somalia. But the odds are that the world won’t look that different tomorrow, and besides, rating Somalia is what you got away from when you moved up to the big guys like the US and Canada. Which means you may be in the uncomfortable position over the next week sometime of writing a very carefully worded press release justifying why you are downgrading the sovereign ratings of the United States of America—and several thousand other issues whose ratings are directly linked to those of the United States as well.
Of course, you might—as has been suggested by a number of commentators, including Felix Salmon—suggest getting rid of the debt ceiling entirely. No other country has one. It serves no useful purpose, other than political posturing, if that’s a useful purpose. It requires hours of pointless discussion. Maybe Obama will get rid of it by fiat, if he can. That would certainly solve your problem for you—no debt ceiling, no interminable debates about excessive borrowings. You can go back to crunching those ratios—which, to be fair, don’t look as good as they used to, but that’s because of the Bush tax cuts (which Obama inexplicably agreed to extend) and Medicare entitlements, which had virtually no cost controls, and those Bush wars that no one wanted to pay for then, and which Joseph Stiglitz said would cost trillions, and he was right, but completely ignored. And they still don’t want to pay for them.
So you’ve got markets starting to wake up this week to the prospect of a real downgrade of the United States. Equity markets wobbled a bit but the real damage has been done to the US$. Gold and the Swiss franc are at all time highs. China, the largest holder of US Treasuries and other US government debt, is starting to get cranky. Hedge funds are starting to smell money here if they short Treasuries early enough—perhaps many already have. There are no good outcomes here, none. All we can do is stand back, put our cash under the mattress, and hope the storm doesn’t turn into a hurricane. Or that common sense will erupt, unexpectedly. But believing that, sadly, would represent a triumph of hope over experience.