James Hamilton, a dismal scientist who teaches the dark art at University of California, San Diego, cuts through the noise and lays out the unvarnished truth on the needlessly convoluted and confused subject of red ink and spending in Washington:
Problem 1 is that the debt-ceiling vote has always been, and always will be, a political charade. The real decision is how much the government is going to spend on programs and how much it is going to collect in taxes. Once Congress has made those two decisions, if spending exceeds taxes, of course the government needs to borrow more. The idea of holding a separate vote on borrowing, as if it was a separate decision from spending and taxing, serves only one purpose — allow representatives from the minority party to grandstand as if they were actually doing something about the deficit.
Daily Archives: October 15, 2013
Inching Towards Default
It’s Tuesday night and the prospects are looking increasingly dim for a political solution for the politically driven risk of a US Treasury default. The credit rating agency Fitch earlier today “placed the United States of America’s (U.S.) ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN),” the firm announced this afternoon. “The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.”
Welcome To A New Era Of (Permanent?) Political Chaos
The Senate is reportedly making progress in crafting a political solution that will reopen the government and raise the debt ceiling. But it’s becoming clear that any solution will be a temporary fix until next round of a potential shutdown and default return. It seems that we’ve entered a new world order where extreme political chaos is standard operating procedure. The price tag for this distressing change will include greater uncertainty and even temporary bouts of blindness on matters of analyzing the economy and pricing assets.