- The Markets And The Debt Ceiling

Politicians are only in politics in the first place because they believe in taking the path of least resistance. They don’t really ever do any difficult things - even when it’s in the best interests of the country. And Republicans are almost as bad as Democrats. I say almost because the Democrat have taken the additional step of convincing themselves that the ‘right path’ and the ‘easy path’ are actually the same thing. We should keep that all this in mind when thinking about the discussion we’re about to watch concerning the debt ceiling.

There will be hyperbole enough on this issue coming from Washington, so let me first address a few facts:

A US debt default would be catastrophic. It would mean the end of our living standard (maybe forever), and before it’s all over, it would mean the end of the Republic. There won’t be any thunderdome involved, but for the effect a default would have on our living standard there might as well be. Six months after a US debt default, there will be 30% unemployment, widespread rioting, and martial law. That should give you some sense of scale. The upshot is that a debt default is NOT a reasonable option.

But the good news is that although the Democrats would like to make you believe that’s the issue at hand, it actually isn’t. No one is actually talking about a default.

Not raising the debt ceiling will not be the same as a debt default. If we fail to raise the debt ceiling, we could instead use the money that Team Obama is currently handing out in the form of entitlements and transfer payments to pay interest instead. This would be catastrophic for all the people who are recieving those payments now. And it’s quite likely that the government will be cut so drastically that it will reduce economic growth in the near term – even if it has a beneficial effect over the longer term. There will be a whole lot of people getting Medicare, Social Security and unionized no bid government contracts who will be seriously impacted, not to mention general motors, who might have to actually sell some cars.

This would be tough for Republicans who will have certainly been responsible (by definition) and will therefore be 'blamed' in the media. But the political consequences of this option for Democrats will be disastrous. The Democrats have made their way in the world by taking from earners and giving the money to non-earners. So instead of just getting a check from the govenrment, their supporters would all have to go get real jobs instead. The media will be ballistic, and the Democrat base will see that as a profound betrayal. Socialism in America might not be at an end, but it will certainly take a long breather.

The Tea party and conservatives on the other hand are the ones who pay for government stuff – not collect it. In many cases that’s what made them conservatives in the first place. So for someone like me for example, the only difference I’ll see will be that instead of my tax money being given to some union hack, south Florida doctor or welfare mom, it will be sent to a Chinese bond holder instead. I won’t get to keep any of it either way – so what do I care? My mom might end up having to move in with us, but with the inflation we’re seeing, she might have to move in with me already anyway.

The point is, a failure to raise the debt ceiling won’t be anywhere near as bad as an actual debt default, because the people who drive our economy won’t really be affected by it. We’ll continue to work hard and make a living, and the govenrment will continue to take a bunch of that living and give it away to someone else. But don’t kid yourself, if we’re making up a room for my mother then it is absolutely a serious issue (even more so if you’re my wife) so it is by no means the path of least resistance for pols.

So what are our viable options? Democrats think raising the ceiling is an absolute. If they had it their way there wouldn’t even be a debt ceiling. And the only threat that the Republicans have to hold over them in negotiations involves circumstances which are genuinely apocalyptic. This isn’t the cat food and dead puppy nonsense the Dems were talking about before – this will be really serious. And if the Democrats don’t believe that the Republicans are willing to face that, (and I wouldn’t believe it if I were them) then they can continue to demand more free stuff for all their supporters and the debt ceiling be damned. However, they are the ones for whom time will eventually run out. So all the Republicans need to do is to negotiate slowly, and they have the advantage.

How will the markets react if the ceiling isn’t raised? Well the markets will definitely react to it but they will not treat it as a defacto default. Interest rates will rise substantially, which will actually be more reason NOT to allow the limit to be raised. The Democrats will do all they can to present it as the apocalypse, but it simply isn’t so. Interest rates will rise substantially because the risk of repayment for US debt will be measurably higher. So the stakes will be higher, but it won’t be the end.

Personally I don’t think they’ll do it. I don’t believe anything has really changed in Washington, so I think the debt ceiling will be increased. A part of me hopes it won’t, but then I think of people like Nancy Pelosi who is crazy enough to convince herself that not paying the Chinese would be a good idea, and I back off from it. If I believed that the Democrats would understand the consequences to a debt default I’d say ‘shut it down’, but the reality is they are economically illiterate enough to blow it all up if we let them – so we have to keep the merry go round spinning.

But don’t believe that the markets will collapse if the debt limit isn’t expanded – they won’t. They’re more durable than that. It will change things, but not catastrophically. So don’t believe the network newsmen, Democrat hucksters and Obama administration economic hacks when they tell you otherwise.