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.

According to The Wall Street Journal, “The latest proposal would reopen the government at current spending levels until Jan. 15 and extend the federal borrowing limit until early February, according to aides familiar with the talks. Lawmakers also would begin longer-term negotiations on the budget, with the task of reaching an agreement by Dec. 13.” The prospect of a short-term fix persuades one House member to grumble that fiscal stalemate may become a permanent feature in Congress for the near term. “Everybody realizes that whatever happens, we’re going to be litigating this another day,” Sen. John Thune of South Dakota, a member of the Senate GOP leadership, tells the Journal.
In fact, Bruce Bartlett reminds us that pushing the US to default on Treasuries isn’t a problem to avoid in some circles. Rather, it’s a means to an end for some hardliners:

Any number of Republicans in Congress have said they will never vote to increase the debt ceiling, no matter what. Others believe the threat of default is the only way to force President Obama to accept their demands, whether it’s an immediate balanced budget or repeal of the Affordable Care Act.

Default advocates are a small minority — 10 to 20 percent of the population, according to a poll conducted in the first week of October by AP/GFK – although at present they appear to be the tail wagging the G.O.P. dog. But most Republicans probably share the view that the Senate minority leader, Mitch McConnell of Kentucky, expressed after the 2011 debt showdown.

“I think some of our members may have thought the default issue was a hostage you might take a chance at shooting,” he told The Washington Post. “Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.”

But hostages sometimes die in the crossfire.

If the first stage of this radical plan is to raise doubts about the integrity of Treasuries, it seems that default advocates can claim some success of late:

While leaders in Washington have been chasing a deal to avert a U.S. default, investors and banks have dumped billions of dollars in government debt.

In the past two weeks, investors have sold mountains of short-term debt issued by the government. Banks have also reduced their holdings, trimming such debt by more than 50% over that period, according to data from the Federal Reserve Bank of New York. Amid anxiety about near-term finances, yields on U.S. debt that comes due in one month have risen to levels higher than for similar securities that don’t mature for six months. Typically, issuers pay more to borrow for longer periods of time.

To be fair, the debt ceiling will almost surely be raised, and soon, and so any reputational damage to Treasuries will be minimal. For good or ill, US debt will remain the leading choice for “risk-free” securities in the world, even as it becomes clear that there’s more political risk associated with these bonds until further notice.
Nonetheless, the radical wing of Republican party will still be able to claim a small victory even if the government reopens and the debt ceiling is raised because any solution in the next day or so won’t really be a solution so much as a temporary lull in the fiscal war.
Is there a way out of this recurring circle of fiscal damnation? Yes, it’s called the next election.