Chris Walen, some time "banking industry analyst and co-founder of Institutional Risk Analytics" recently stated on the The Daily Ticker that there's no down side to not raising the debt ceiling:
"My view is that Congress should vote down any debt ceiling measure unless President Obama agrees to sign the balanced budget amendment. Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland and Ireland today, it will be a good thing for America's political debate to default — at least for a few weeks. Then people will know that the once unthinkable is very possible."
Let's take a look at his assertion for a second:
Geithner and other fiscal policy makers are no doubt driven by the uncertainty principle in finance (not unlike Heisenberg's uncertainty principle in Physics) - it's a basic mantra with economists and financiers. ANY uncertainty in the underlying assumptions or mechanics of the markets MUST be eradicated, for only with certainty can efficient economic markets function (or other words to that effect.)
What Mr. Walen proposes to do is inject uncertainty into the markets. So what's interesting is that no one really knows what would happen if the US defaulted (which is what we're really talking about, even if it's a few days or weeks) on its debt. What is known is that every economist, banker, treasurer in the world uses a basic assumption of the "risk-free" rate to be US government debt. Every other rate in the world is in some way based on it. So for the US to default on its debt, even for a matter of days, could have the equivalent effect of us waking up one day and discovering that the laws of gravity were annulled, and the moon had left its orbit about the earth ... Or not.
But for a "banking industry analyst" to assert there's no downside to allowing this to happen is simply irresponsible, or slavish adherence to some dogma that has no basis in fact or history. Truth is we don't know.
But wait! "All he's saying is that we should cap the debt and pay the interest out within that cap" you say.
Perhaps, but let's look at the reality our friends in Congress are dealing with.
This suggestion is only valid if, as part of the process, Congress is clear that debt is serviced before anything else including essential services, military, fire fighting, CDC etc. We'll have made a point of paying debt holders their interest before ensuring the national trust and security. Goodbye pork barrel legislation that buys all those corporate campaign contributions. While we could spend days or years arguing the merit of this as a decision, and its consequences, the ONLY way to not raise the debt level without a priori addressing the spending issues is to agree to something like this.
I guess another nit to cite is that Social Security, which makes up about $760BN in the current budget (if memory serves me right - it's almost identical to military spending before black ops (estimated somewhere between $50-100BN a year) or off budget military spending including the wars in Iraq and Afghanistan (currently running something like $50BN and $120BN for 2011 (Congressional Research Service - page 7 note the chart)) is non discretionary spend which ostensibly has its own source of funding (the $2 - $3 Trillion set aside in SSAN payments). This, coupled with other non-discretionary spending (Medicare - $468 billion, Medicaid - $269 billion, (both of which have independent funding sources) TARP - $13 billion, and all other mandatory programs - $598 billion.) totals $2.1 Trillion out of a $3.7 Trillion budget. (About.com US Economy)
Some other inconvenient truths here:
1) Debt servicing (the INTEREST we pay on treasury notes, bonds and other Federal Debt) is about $241 BN in the current budget, or about 15% of total discretionary spend. (GovernmentSpending.com)
2) Somewhat dated (as of July 2010) but likely still directionally direct - the average maturity of Treasury debt is about 55% maturing within 36 months (~30% within 12 months), which means that we have to reissue about $4.2 Trillion in debt within the next year to stay at the current debt ceiling. (Presentation to the Treasury Borrowing Advisory Committee U.S. Department of Treasury Office of Debt Management February 1, 2011 page 20)
So, put plainly, to move forward with capping the debt we have to be prepared to:
1) Cut 15% of the discretionary budget immediately - given the incredible lack of foresight or intestinal fortitude shown by the current occupants of the Capitol Building (both sides of the aisle) I'd say we have a better chance of a small planetary body striking Washington and destroying the planet, thus eradicating the problem entirely with no work involved (they can all breath a sigh of relief!), and/or
2) Refinance the existing debt (for certainly we wont be able to retire any of it given constraints identified above) with increasing expense (e.g. higher interest rates), which
3) Leads to debt servicing occupying an even greater portion of the discretionary spend leading to
4) repeating at point one ad nauseum.
So unless I've missed something, to facilely suggest, as Chris Walen implies, that we should freeze the debt ceiling without increasing revenues and/or decreasing outlays FIRST, without catastrophic consequences coming from some quarter, either through defaulting on debt covenants, or by essentially shutting government down by dealing with the debt servicing issue, is misinformed at best.
Personally I think there's a better chance of waking up and finding the laws of physics have been overturned than for Congress to successfully freeze the debt ceiling as Chris Walen has proposed. The banking system will yank the rope they have Congress by balls with just like they did during the last financial fiasco (the market melt down of 2008) and get them moving. Look to Gierthner and other financial mavens including the heads of the banks to increasingly get shrill about this in the next few weeks.
Meanwhile, I look forward to seeing the Moon spiraling out of orbit, being able to leap tall buildings in a single bound (but wait, how do I get back down with no gravity?) and other such fantasies!
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