Friday, June 3, 2011

Debt-Ceiling Scare



Krauthammer thinks Geithner is being a drama queen.

5 comments:

Megan said...

So does former Soros fund manager Stanley Druckenmiller

http://online.wsj.com/article/SB10001424052748703864204576317612323790964.html

TJE said...

Tim Geithner's demeanor makes me nervous.

njDylan said...

sounds like some debtagoguery!

Patrick_L said...
This comment has been removed by the author.
Patrick_L said...

I'll just point out that the current meme spreading among conservatives that keeping the government functioning after it hits the debt ceiling would be relatively easy is very false. They correctly point out that we'll have about 70% of the revenues necessary to keep the full government functioning at current levels. However, they ignore that revenue collection is subject to great variation and unpredictability, while expenditures are often highly clumped which means the government would have to be not doing stuff if they have any hope of paying other things (like monthly Social Security benefits). In addition, the money coming into the government isn't very fungible in certain ways, Treasury is heavily restricted by certain laws that they can't break, and the rolling over of debt is a complicated task that has little room for error which trying to handle while past the debt ceiling will be an increasingly difficult task. Handling Social Security payments could turn out to be a real pain. Also, the 70% of revenues figures doesn't go very far, since it will only cover debt service, the mandatory programs, and about half of defense- meaning that half of defense and the entire rest of government would need to shut down. That's not going to happen, but people should realize a few points about the debt ceiling: a) yes, obviously the Treasury will try its best to put debt service first and manage that, but that isn't as easy as people make it out to be- which is scary since the Treasury will be limited in its ability to handle anything that goes wrong, and debt-holders could still view the situation as a general default by the U.S. which would likely shatter our economy in the short-run b) other parts and expenditures of the government will be halted, which we have no idea whether or not the markets will consider that a default, c) that impact on government will quickly worsen the weak economy (because like it or not, economists are in agreement that cuts to government are a short-run drag in of themselves) d) costs of running the government could increase- it's not just debt-holders who would increase their risk premium if they don't get paid on time. Government contractors for instance may have little choice but to wait to be paid, but any delays will damage their business and they will likely seek compensation through charging a risk premium on the costs of future government assignments e) prioritization isn't going to come without serious consequences and cuts in many things people think are very important. 70% is not nearly enough, and you would quickly run into questions of Defense vs. Social Security benefits and the like. This is of a whole order of a magnitude beyond the CRs and government potential shutdowns then, and our nation's leaders shouldn't even consider playing around with it.
Also, many on Wall Street have sharply disagreed with Druckenmiller and said they would not wait to be paid and they would not accept the government hitting the debt ceiling.
Basically, the debt ceiling is and isn't a leverage point. It is a game of chicken for both sides that puts the entire U.S. economy at risk. No one knows for certain what will happen, or who will get the blame if something goes wrong. The debt ceiling is a bomb, and we don't know if it will explode in our faces or not.