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Saturday, January 05, 2013

Default Ceiling: Bluffing into the Nuts

by Calculated Risk on 1/05/2013 08:49:00 PM

I wrote several posts about the "debt ceiling" debate in 2011.  The debate clearly scared many Americans and impacted the economy.  Hopefully this time the "debt ceiling" will be raised well in advance of the deadline.

I prefer "default ceiling" because "debt ceiling" sounds like some sort of virtuous limit, when, in reality, the vote is about whether or not to the pay the bills - and voting for default is reckless and irresponsible.

Note: Several financial articles recently have used poker terms - and the title of this post is my contribution to this sad trend.  "The Nuts" is the best possible poker hand in a given situation. Bluffing into the nuts is a losing play - and that is what the Congress is trying to do with the "debt ceiling".  The sooner they fold, the better for the economy and the Congress.

From the WaPo: GOP dissension over debt-ceiling strategy

House Speaker John A. Boehner (R-Ohio) likewise insisted that Republicans hold the line, telling his members they must demand that every dollar they raise the debt limit be paired with commensurate spending cuts.

But other Republicans counseled caution, warning that pressure from the business community and the public to raise the $16.4 trillion federal borrowing limit renders untenable any threats not to do so and will weaken the GOP’s hand if their stance is perceived to be a bluff.
It is a bluff. As Republican Senator Mitch McConnell noted in 2011, if the debt ceiling isn't raised the "Republican brand" would become toxic and synonymous with fiscal irresponsibility.

Part of the problem is some congressmen don't understand economics. Look at this quote from the WaPo article:
“It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain,” [Senate Minority Whip John Cornyn (R-Tex.)] wrote.
First, hitting the default ceiling will not just "shut down the government", it will force the government to stop paying some bills (most of the bills are for Defense, Medicare, Social Security and interest payments on the debt).

Second, the US is not plodding along "the path of Greece, Italy and Spain". Geesh.

I reread some of my posts from 2011, as an example Debt Ceiling Charade: The Smart Options.
Option #1: Eliminate the debt ceiling. The debt ceiling is a joke. It serves no purpose except political posturing. It is not about the deficit - it is about paying the bills, and the U.S. will pay the bills.
Option #2: Pass a "clean" bill raising the debt ceiling enough to get through the next election (so the politicians don't have to embarrass themselves again). Congress could do this at any time. That is why voters would blame the party controlling the House if the debt ceiling is not raised.
I still prefer Option #1, but one thing is clear, the Congress will fold and the debt ceiling will be raised. There might be some agreement with the "sequester" that gives Congress some cover, and if that is the approach, then Congress should look to settle this early.

In 2011, I started writing about the debt ceiling when it became clear the threat of default was impacting the economy. A couple of old posts: Debt Ceiling Charade impacting Short-Term Credit Markets and Random Thoughts.  From July 30, 2011:
"I remain confident that Congress will raise the debt ceiling; however the circus in D.C. is clearly impacting the economy. This morning I spoke to a business owner who is negotiating a new lease to expand. His lawyer told him not to sign the lease until the debt ceiling issue is resolved. I believe similar caution has gripped business owners and consumers in many places - and impacting consumer and business confidence."
This time I'm going to start criticizing Congress earlier in the process; 2011 was ridiculous and reckless.