While fights over Supreme Court and Federal Reserve Board nominations come sporadically as vacancies arise, there is one political battle we can almost always count on from year to year, and that is the struggle over extending the federal debt ceiling.
If it’s not increased, we’re told, the U.S. government will default on its obligations, Social Security and other government program beneficiaries will be rendered destitute, Treasury bondholders will see the value of their holdings decimated as they go without their interest payments, our soldiers and other government employees won’t get paid, and the global financial system will grind to a halt.
Most serious-minded adults, however (I hope), have learned to ignore this annual game of chicken that the White House and Congress insist on playing every year, although the financial press and media commentators profess to take it seriously.
Whichever political party controls the White House or the houses of Congress, the drama generally follows the same predictable format, namely the Democrats always favor raising the debt ceiling to avoid the catastrophes described in the first paragraph, while the Republicans express opposition in the name of fiscal responsibility.
Yet no matter how long the drama plays out, the outcome is always the same: the Republicans eventually knuckle under, life goes on and everyone gets their money, until the next debt debacle. Lather, rinse, repeat.
This year, it seems, the play has begun early.
Five whole months before the government allegedly runs out of money without a debt limit increase, Treasury Secretary (and former Fed Chair) Janet Yellen has already sounded the alarm and instructed her troops to put in place “extraordinary measures” to allow the government to keep paying its bills before it hits the current $31.4 trillion debt limit in June.
Yellen wasted no time in using the dreaded D-word to emphasize the supposed seriousness of the situation.
“A failure on the part of the United States to meet any obligation, whether it’s to debtholders, to members of our military or to Social Security recipients, is effectively a default,” she said.
She also quickly dismissed suggestions that should the debt limit not be raised in a timely fashion the Treasury would be able to prioritize payments to recipients, be they bondholders, senior citizens or soldiers.
“The Treasury’s systems have all been built to pay all of our bills when they’re due and on time, and not to prioritize one form of spending over another,” she said last week.
I find that a little difficult to believe — every computer system in the world can be modified to accommodate some hiccup or another — but her comment went unchallenged.
One thing I’ve always found amusing about the whole annual debt limit-default drama is the market’s reaction to it, which is generally no reaction at all or the one you would least expect to happen, namely investors rushing to buy the very instrument that is supposedly being defaulted on, i.e., Treasury bonds.
If you knew a country or a corporation might default on their debt obligations, your first instinct would be to avoid them, wouldn’t it?
Yet, the closer we ostensibly get to a U.S. government default, the market reaction is to buy Treasuries, under the time-honored flight to safety.
That alone should tell you how seriously to take all this. No sensible person believes — or should believe — that the U.S. government is going to default, no matter how much scare talk comes out of Washington. Ain’t gonna happen.
But stay tuned. We’ll no doubt be hearing more about this as doomsday approaches. Try not to let it disturb your sleep or influence your financial decisions.
Meanwhile, we have a Fed meeting announcement to prepare for next Wednesday.
Compared to the Fed’s 2022 meetings — during which it raised interest rates seven times by a total of 425 basis points — next week’s meeting should be relatively uneventful and fairly predictable.
That is, we can probably expect the Fed to raise its federal funds target by another 50 bps, the same increase as the one at its previous meeting in mid-December following four straight 75 bp hikes. That would bring the fed funds rate to 4.75%, or close to where most people believe the Fed will end up.
Given the recent softening in the labor market and moderation in the inflation rate, it certainly could be argued that the Fed should reduce the increase to 25 bps, although that doesn’t seem likely to happen.
The Fed doesn’t want to send the message that it is losing its zeal to drive down inflation to its 2% target and giving in to just about everyone else clamoring for the Fed to at least pause its rate increases.
Even a 25 bp hike would be seen as the Fed giving into pressure, so a 50 bp increase seems the most likely outcome, whether warranted or not.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
2 thoughts on “Treasury Default Hysteria Begins”
Seems like a both sides are guilty commentary. Here's what I see. Only Repugs in Congress play these games with Demo Presidents. Cant recall a single instance where a Demo Congress pulled this c**p with a Repug Pres...Its merely a Repug hardball strategy to get the Dems to cut back SS/MEDICARE/MEDICAID policies. If anyone knows better I'd love to here it.
Let's recall the last $1.7 trillion bill passed by the Congress, at the last minute before New Congress sworn in, problem solved NO need to raise the Debt ceiling.
BTW, How many times can you personally go to your bank and Raise your spending limit before your cut off?
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