- Obama's "Technical" Default

If you are a Greek debt holder and you are for whatever reason compelled to give up something of one value for something else of a lesser value, then it’s a technical default. Moody’s is pretty clear on this, so the only way for the Greeks to avoid it, would be for some other entity with better credit expectation to provide a guarantee for their debt. The result would be a sort of European Brady-Bond. Inevitably, this will fall to France and Germany. They can either pony up a guarantee for Greece, or they will be likely to see their dream of a unified Europe fail.

Keep in mind, the Greeks don’t really deserve it. They have been fiscally irresponsible in a manner that would make Maxine Waters blush. The more you learn about it the more you find yourself saying “screw these people. No one should be allowed to ignore reality for so long, or to ignore it so completely.” But that big Napoleonic dream dies hard, and you can’t have a big country without a big cost. So if the French and Germans really want it, they’re going to have to pay for it.

Europe’s big political tent includes stoic Germans who would rather anything else than inflation, and delusional Greeks who think they can burn their finance ministry to the ground while still borrowing Euros at discount rates. Something is going to give. Either the French and German politicians will convince their voting public to accept the costs of European unity (the main cost being higher rates in Germany and France to keep inflation at a minimum after absorbing the cost of Greek debt), or someone is going to have to leave the Euro. All the rest is process. But there is no one who has political power who will benefit from a Greek default so they’re doing their best to avoid it (even if they probably shouldn’t).

As for the US, the talk is getting exhausting. People look to the current interest rates and from that, determine that there is no default panic out there. If it were a working market I’d agree, but if we know one thing about the treasury market, it’s that it’s not working properly. QE2 created a 1.2 Trillion dollar bond buyer who wasn’t compelled to make a profit. Everything else in the market has been a reflection of that. No one is shorting Treasuries in any meaningful way because they don’t dare. The Fed can lose money forever so you “can’t fight the fed.” Our credit rating could be downgraded to junk, putting us on the same page as Portugal, and so long as the threat of more QE remains out there, no one will short Treasuries.

So we have a political issue which is turning into a financial one, and there are no properly functioning markets to give policy makers feedback as to the wisdom of their decisions. That’s what markets do – they give policymakers a window into how their policies will affect the real world. But in this case, the first policy shut off proper functioning of the market. And as a result, all manner of highly imprudent decisions are being hatched in a bubble –unaffected by how they’ll be viewed in the ‘real world’ outside Washington. All that matters in this debate is the politics. And that raises some dangerous questions.

From the ‘new idea’ column, Chuck Schumer has suggested that there is a constitutional basis for simply issuing debt in defiance of any debt limit. I’m no lawyer, but the lawyers I speak to who know something about this have a word to describe something like that. It’s called an ‘IMPEACHABLE’ offense. Obama does have a history of forcing the people to do things they don’t want, but I think the consequences to something like that will be greater for him than they were for Obamacare. Still – he may run the risk as opposed to facing the alternatives.

Another option is to simply pay the debt, and shut down the government until a deal gets made. I personally like this option, but I don’t think it’s very likely. It will result in Obama’s strongest supporters, unionized civil servants and the ‘client class’ of federal largess recipients, taking it right on the chin. Those looters are his people, and getting free stuff for them is the whole reason he got politics in the first place.

The final option is simply a default, or at least a selective default. He’ll pay CALPERS (who support him) but not the Fed or the Chinese. He’ll then try to use his allies in the media to spin it so that it seems to be someone else’s fault. The press will do all they can to facilitate this, but it will only be a short term thing. I believe in the end it’s all on him. The fact is, this is his economy. He owns it. It’s his legacy. His spending binges and his default will be how he’s remembered. He will be the president who made America look like a third rate financial basket case, and may very well be remembered as America’s very worst president.

That’s the prize that is waiting for Republicans if a deal doesn't get made and we see a ‘technical default’. IT will inevitably be viewed as Obama's problem, no matter what the NY Times editorial board, NBC news, and the chicks on ‘the View’ have to say about it. And because the political upside for them is so great, I think it’s much more likely than anyone thought.

Of course – to the markets, there’s no such thing as a ‘technical default’. They can call it what they want but if the market perceives it as over the line, then they’ll treat it as a default no matter what the press says. And with the markets so badly broken, there is no way for the Washington insiders to know that in advance.

Greece will default (or actually probably already has). And with the political incentives where they are, I think a default for the US is actually right around 50% right now. If the wind blows, it really can happen.

I used to joke that if the US defaults on it's debt then the only commodity worth anything will be bullets.

Time to buy bullets.