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Sunday, July 28, 2013

They're Back! Congress threatens to Default Again

by Calculated Risk on 7/28/2013 05:12:00 PM

Treasury Secretary Jack Lew was on Meet the Press today (recorded Friday). Lew said:

"The fight over the debt limit in 2011 hurt the economy, even though, in the end, we saw an extension of the debt limit. We saw confidence fall, and it hurt the economy. Congress needs to do its job. It needs to finish its work on appropriation bills. It needs to pass a debt limit."
Consumer Sentiment
Click on graph for larger image.

Here is a graph of consumer sentiment.  Notice the huge spike down in 2011 - that was due when Congress threatened to "not pay the bills". 

As Jack Lew notes, there is no reason to do this again. 

The following excerpts are from a post I wrote the last time Congress threatened to not pay the bills: Default Ceiling: Bluffing into the Nuts

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.

The bottom line is Congress is being silly (again), and they will raise the debt ceiling.  It is just a matter of when. Note: There is a reason Congress never threatens to default right before an election, they hope everyone will forget!