Sunday, May 15, 2011

Debt Ceiling Expected to be Hit Monday

Get your popcorn ready. The real dramatics should start Monday.

The Treasury Department is expected to hit its $14.3 trillion borrowing limit Monday, making it unable to raise more money via the bond markets, according to CNBC.

On CBS's "Face the Nation," House Speaker Boehner said he is ready to make a deal on raising the debt ceiling but he said that an increase in the debt limit must be linked to spending cuts and deficit reduction.

Notice Boehner is not talking about real cuts, whereby cuts are significant enough to eliminate the deficit, but merely a "deficit reduction", meaning spending continues to escalate beyond government income. Please, pass the smoke and mirrors.

Meanwhile, President Obama at a CBS sponsored town hall said:
If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system.

We could have a worse recession than we already had, a worse financial crisis than we already had.
Part of this is true. If the U.S. stopped meeting interest payments, and investors started to believe that those payments were not going to eventually happen, there would be a panic sell off in the Treasury securities market. However, most Treasury security holders likely suspect that a halt in payments would be temporary, which means a severe a sell off might occur, but nothing more.

Further, a permanent Treasury default, wouldn't cause a new recession. It would hurt Treasury debt holders and many of those who worked for the government, beginning and end of story. The long-term result woud be a more robust private economy.

But all this talk of permanent default, at this stage, is make believe. Boehner is not going to let the structure that he is a part of collapse. There will be a good show. Maybe even a few days of no interest payments, then it will be back to normal, with the Treasury issuing even more debt, the government continuing out of control spending, and Bernanke calculating how close he is coming to blowing price inflation through the roof because he has to buy a good chunk of the new debt---because no on else will.


  1. Why would the US Treasury, being so afraid of "upsetting" the bond markets not just make interest payments first priority? There is more than enough tax revenue to cover interest payments, and even a lot of other things. If the US government has to cut back roughly 30% to balance the budget, why is everyone so focused on making interest payments the first casualty?

  2. wait, what? where have i been? they actually haven't yet raised the ceiling? i guess i'll have to make some very quick adjustments to my stock portfolio on monday (get rid of all my cash and buy gold stocks, i guess?). what do you folks think?

  3. Wound't even 1 day of no interest payments be considered a "credit event" by the ISDA:

    How many swap payouts would be unexpectedly triggered? What other unforeseen chain reactions could come about due to financial contracts with clauses containing credit events on the world's benchmark "risk free asset"?

  4. i thought geithner said "with better than expected tax reciepts" that he would be able to delay it till august 2nd?

  5. Sounds like Boehner doesn't understand the concept of a debt ceiling. It's whole purpose is to prompt spending cuts and deficit reduction. If those are really his goals, keeping the debt ceiling where it is would be the obvious first step.