How will a fight over the debt ceiling affect the market?

[donheff]

I would like to post this question in Fire and money but I suspect the topic is too political for that. I just read a Reuter's poll that says 71% of Americans don't want Congress to raise the debt ceiling. To me that is a scary figure because it hints that the coming fight will be worse than I expected. In any event, to the title question -- if the fight is rough, and particularly if the debt ceiling is not extended for a period what do people expect will be the short term financial impact?

 

[Texas Proud]

Just so I can blow off some steam....


I hate it when the talking heads say that we will 'default' if we do not raise the debt ceiling... we will not... we will continue to pay the interest and principal due on all the debt that is out there...

What will happen is the gvmt will not be able to continue to borrow and they will have to fix the deficiet right now... no waiting... will this hurt... sure, but it is NOT a default...

 

[M Paquette]

I hate it when the talking heads say that we will 'default' if we do not raise the debt ceiling... we will not... we will continue to pay the interest and principal due on all the debt that is out there...

What will happen is the gvmt will not be able to continue to borrow and they will have to fix the deficiet right now... no waiting... will this hurt... sure, but it is NOT a default...

Just curious... When we reach the debt ceiling, and the next round of interest payments on Treasury notes are due, there are no cash reserves left to pay the interest, and perhaps some of the notes have matured and are payable, what do you call that?

 

[Nords]

I would like to post this question in Fire and money but I suspect the topic is too political for that. I just read a Reuter's poll that says 71% of Americans don't want Congress to raise the debt ceiling.

I'm still stuck on the hypothesis that Congress does what the majority of Americans want.

 

[Texas Proud]

Just curious... When we reach the debt ceiling, and the next round of interest payments on Treasury notes are due, there are no cash reserves left to pay the interest, and perhaps some of the notes have matured and are payable, what do you call that?

I call that bad management by the Treasury.... they take in about $217 BILLION per month... I looked up and the interest payment was only $19 billion in December... that still leaves about $200 billion per month to run the gvmt.... (note... I am not sure if that was paid or accrued interest as it says 'accrued' on the download I got)...

As for the maturing notes... they can borrow that money the same day they have to pay it and will not go over...


Edit to add.... I checked and the debt outstanding as of 1/1/2007 (not that long ago) was 8,680,224,380,086.18 ..... How did it got to be 14,019,559,567,587.86 as of yesterday

 

[ziggy29]

Just curious... When we reach the debt ceiling, and the next round of interest payments on Treasury notes are due, there are no cash reserves left to pay the interest, and perhaps some of the notes have matured and are payable, what do you call that?

Inflationary pressures as they print money to service the debt and pay current obligations.

 

[Htown Harry]

The relationship between the debt ceiling, the possibilities of "financial" solutions such as Ziggy suggests and adjustments to the fiscal state of the government relative to income, spending and the deficit make this a three-variable equation.

I would think the answer to Donheff's question depends greatly on the whether "don't raise the cap" advocates and Congress are debating options for addressing the whole picture vs. engaging in a war of [-]principles[/-] words that focuses only on the debt ceiling.

The former represents change, the latter change with a greater chance of sudden economic disruptions. Markets are much less likely to do well in chaotic times.

 

[Pete]

No raising the debt ceiling=No growth=stock market crash.

The only other option is to hide more debt at the Fed.

 

[ERD50]

... if the debt ceiling is not extended for a period what do people expect will be the short term financial impact?

The same as if I didn't raise my budget - I wouldn't spend more?

Is that too simple an answer?

-ERD50

 

[ERD50]

No raising the debt ceiling=No growth=stock market crash.

Does this mean the only way I can improve my financial position is to take on more debt

-ERD50

 

[ziggy29]

The same as if I didn't raise my budget - I wouldn't spend more?

Is that too simple an answer?

Yes, IMO, because one individual's finances aren't going to "move the needle" on the overall national or global economy, or their financial markets.

 

[ERD50]

Yes, IMO, because one individual's finances aren't going to "move the needle" on the overall national or global economy, or their financial markets.

But what good is moving that needle, if it based on borrowing? Doesn't that end up in a crash if taken too far?

If we were in a short term trough, increasing debt could be justified. It would smooth out the problem, so fewer people are hurt by a deep trough, and we pay it off in good times when it is less painful to do so (that is Keynesian economics, right?). But I suspect that with global competition and other factors, we are not just in a trough. I think we likely will need to revert to a 'new mean'. I don't see how we can adjust to a lower level by more borrowing.

-ERD50

 

[Texas Proud]

ERD50...


The economy is growing... we can take on more debt... the problem is we are taking on to quickly... so our debt to GDP is going up FAST....

You are right... we are supposed to 'pay it down' in good times... but if the economy is doing well then you might improve things by just borrowing a very little and let the debt as a percent of GDP go down... (yes, this is gvmt math here)....

Me... I would like to see the actual $ amount of debt go down... heck, lets just get it back to the 2007 level.... but that will not happen in my lifetime, nor my kids lifetime, nor my grandkids (whenever I get some)....

 

[donheff]

I was hoping we have some national economics gurus here who could opine with some authority. I have read a lot of scary stuff about the impact of a failure to raise the ceiling. As I have heard it told, we can't simply freeze spending at the current level (e.g a continuing resolution) and stay flat. Current obligations will cause our debt to raise above the ceiling pretty much no matter what we do. Then, the story goes, we will be unable to pay off obligations that come due. I am not worried about a true default (US repudiates it's debts) but I am wondering whether there would be turmoil in international markets as the result of this (a la what Pete said). Long term, this will be resolved in some manner. Short term is this likely to cause enough of a correction to warrant some market timing? As things stand now, I plan to just stand pat and weather the bump but...

 

[M Paquette]

The same as if I didn't raise my budget - I wouldn't spend more?

Is that too simple an answer?

-ERD50

Yup. The incoming revenue at that point from taxes and tariffs is 'bursty', tied to quarterly periods, and won't quite cover minimal expenses for any length of time. Treasury can play some bookkeeping games, just like the last time Congress pulled this stunt (Yah. It's happened before. They even managed to balance the budget, sort of, for a couple years).

Eventually, around 6-10 weeks in, depending on exactly when in the quarterly and annual cycle we hit the limit, Treasury runs out of cups to hide the ball under. Some soldier will use ammunition, or be hurt and require medical care, or an outbreak of angry old people on the National Mall demanding their checks will require National Parks Service folks to come into work, and the jig will be up.

I actually think there would be some good entertainment value in not raising the debt ceiling, in terms of the 'instant outrage' and forced enlightenment of the populace as to what's actually covered by the federal budget. We currently run a deficit so large that cutting all 'discretionary' spending to zero doesn't quite balance the budget. If we go back to the last full year where we had a budget in place, FY 2009, we see that discretionary spending was 1.21 trillion dollars, and the deficit was 1.4 trillion dollars. 'Discretionary' spending included 515.4 billion for DoD, 145.2 billion for the Global War on Terror, 70.4 billion for the Department of Health and Human Services, and so on.

The technical default in Treasuries will cause problems in the bond markets, and should nicely raise interest rates for folks looking to buy Treasuries in the secondary market on the dip. Folks currently holding Treasuries should be prepared for a drop in value as the US notes become viewed as being fairly risky (Greece/Ireland/Portugal risky). This will barely be a speed bump for the stock market, though. Last time the market just charged on ahead through the federal government shutdown.

 

[M Paquette]

I was hoping we have some national economics gurus here who could opine with some authority.

Here's a nice piece from Morgan Stanley:

Morgan Stanley - Global Economic Forum

 

[dex]

LONDON—Two leading rating firms have cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.
The warnings issued Thursday echoed prior statements by the companies, however, and financial markets largely ignored them. Treasury yields, which move in the opposite direction as prices, were lower in late-morning trade and the cost of insuring U.S. debt against the risk of default, already below that of Germany, the euro-zone benchmark, barely budged.
"My traders are shrugging it off as stuff we've heard before," said Tom Di Galoma, head of interest-rate trading at Guggenheim Partners in New York.
Moody's Investors Service said in a report that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.


S&P, Moody's Warn On U.S. Credit Rating - WSJ.com

 

[Independent]

Yup. The incoming revenue at that point from taxes and tariffs is 'bursty', tied to quarterly periods, and won't quite cover minimal expenses for any length of time. Treasury can play some bookkeeping games, just like the last time Congress pulled this stunt (Yah. It's happened before. They even managed to balance the budget, sort of, for a couple years).

Eventually, around 6-10 weeks in, depending on exactly when in the quarterly and annual cycle we hit the limit, Treasury runs out of cups to hide the ball under. Some soldier will use ammunition, or be hurt and require medical care, or an outbreak of angry old people on the National Mall demanding their checks will require National Parks Service folks to come into work, and the jig will be up.

I actually think there would be some good entertainment value in not raising the debt ceiling, in terms of the 'instant outrage' and forced enlightenment of the populace as to what's actually covered by the federal budget. We currently run a deficit so large that cutting all 'discretionary' spending to zero doesn't quite balance the budget. If we go back to the last full year where we had a budget in place, FY 2009, we see that discretionary spending was 1.21 trillion dollars, and the deficit was 1.4 trillion dollars. 'Discretionary' spending included 515.4 billion for DoD, 145.2 billion for the Global War on Terror, 70.4 billion for the Department of Health and Human Services, and so on.

The technical default in Treasuries will cause problems in the bond markets, and should nicely raise interest rates for folks looking to buy Treasuries in the secondary market on the dip. Folks currently holding Treasuries should be prepared for a drop in value as the US notes become viewed as being fairly risky (Greece/Ireland/Portugal risky). This will barely be a speed bump for the stock market, though. Last time the market just charged on ahead through the federal government shutdown.

Are you saying that Treasury prices should fall slowly, as long as various politicians appear to be playing chicken with the issue, and then recover sharply once they reach a compromise?

 

[M Paquette]

Are you saying that Treasury prices should fall slowly, as long as various politicians appear to be playing chicken with the issue, and then recover sharply once they reach a compromise?

I don't think there will be a sharp/fast move up or down as long as there are no surprises. The bond market tends to be a good bit calmer than the stock market, outside of the odd liquidity crunch (Q4 2008...). The market is pricing in a small default risk right now. Once the rhetoric machine fires up and the Usual Suspects begin bloviating, the market may adjust further.

Compromise and settlement are already what's expected. I think any surprise would be on the downside; something like a Senate filibuster against raising the debt ceiling, or a bill weighed down with 'non-negotiable' conditions found unacceptable by sufficient parties.

 

[myself]

Yup. The incoming revenue at that point from taxes and tariffs is 'bursty', tied to quarterly periods, and won't quite cover minimal expenses for any length of time. Treasury can play some bookkeeping games, just like the last time Congress pulled this stunt (Yah. It's happened before. They even managed to balance the budget, sort of, for a couple years).

Eventually, around 6-10 weeks in, depending on exactly when in the quarterly and annual cycle we hit the limit, Treasury runs out of cups to hide the ball under. Some soldier will use ammunition, or be hurt and require medical care, or an outbreak of angry old people on the National Mall demanding their checks will require National Parks Service folks to come into work, and the jig will be up.

I actually think there would be some good entertainment value in not raising the debt ceiling, in terms of the 'instant outrage' and forced enlightenment of the populace as to what's actually covered by the federal budget. We currently run a deficit so large that cutting all 'discretionary' spending to zero doesn't quite balance the budget. If we go back to the last full year where we had a budget in place, FY 2009, we see that discretionary spending was 1.21 trillion dollars, and the deficit was 1.4 trillion dollars. 'Discretionary' spending included 515.4 billion for DoD, 145.2 billion for the Global War on Terror, 70.4 billion for the Department of Health and Human Services, and so on.

The technical default in Treasuries will cause problems in the bond markets, and should nicely raise interest rates for folks looking to buy Treasuries in the secondary market on the dip. Folks currently holding Treasuries should be prepared for a drop in value as the US notes become viewed as being fairly risky (Greece/Ireland/Portugal risky). This will barely be a speed bump for the stock market, though. Last time the market just charged on ahead through the federal government shutdown.

While I haven't gone through and verified all the date for this article/chart: 2010 United States federal budget - Wikipedia, the free encyclopedia

You'll notice that there's a link for 2009 Deficit: 2010 United States federal budget - Wikipedia, the free encyclopedia
For that link it shows $766B in spending for TARP, ARRA, and Omnibus bills.

I'd have to think that if that much money wasn't borrowed, then the deficit (borrowing money again) wouldn't have cause us to be anywhere near the ceiling at this point in time.

And here's a "cutesy" article written about discretionary spending and the very real worry regarding the interest paid on the debt: http://www.businessinsider.com/char...-discretionary-spending-is-meaningless-2010-1

 

[Mulligan]

While I believe the 71% number in a generally worded statement would be accurate, the devil is in the details. Start cutting back medicare, those people affected will howl, cut back social security, those people will complain. On and on with military cut backs, entitlements, etc. etc. That 71% number will crumble fast when it hits you individually. I'm sure I would be no different.

 

[chinaco]

There will be some spending cuts.... Taxes will be raised to pre-bush tax levels after 2012.

 

[dex]

There will be some spending cuts.... Taxes will be raised to pre-bush tax levels after 2012.

Election year - both candidates will probably say they should be extended another 2 years and evaluated after that.

 

[Htown Harry]

Here's a nice piece from Morgan Stanley:

Morgan Stanley - Global Economic Forum

Good stuff, very enlightening. Thanks for the link.

 

[Pete]

Does this mean the only way I can improve my financial position is to take on more debt -ERD50

I know this is tongue in cheek but...1/3rd of last years federal budget was debt. Can't imagine what would happen if that stopped.