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Debt Talks Still At Impasse; Republicans Go For Unilateral, Short Term Gambit

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Ready your popcorn, this contrived DC debt ceiling drama is set to go for quite a few rounds.

The latest from the Washington Post:

In a conference call with House Republicans, Speaker John A. Boehner (R-Ohio) said he would press ahead with a two-stage strategy that would give the Treasury only about $1 trillion in additional borrowing authority, forcing another debt-limit battle early next year with the parties in the heat of the 2012 presidential campaign.

“If we stick together, we can win this for the American people,” Boehner told his troops, participants said.

Boehner and Treasury Secretary Timothy F. Geithner appeared on the political talk shows Sunday at the start of a day of crucial talks, and their comments confirmed that the gap between Republicans and the White House on the debt ceiling remains wide and deep.

Geithner warned that a debt-reduction deal that doesn’t result in raising the nation’s legal borrowing limit through the 2012 elections remains unacceptable to the White House and cannot win enough Democratic votes in Congress to ensure passage.

Boehner has apparently never heard of a Pyrrhic victory.

What will be interesting is if the threat voiced by the Administration, namely, the market reaction, isn’t grim. Equities in general are overvalued given the lack of realistic prospects for top line growth (cost cutting may lead to impressive profits, but it’s a self limiting strategy that has gone way beyond its normal sell by date because a fair bit of the cash has propped up prices via stock buybacks) and fragility in the mortgage markets (as one wag said, he never thought he’d get to short subprime twice). Given recent Eurozone-related volatility, anything less than a percent and a half in equity markets signals concern but is well short of panic. And the real test is what happens in Treasuries.

In fact, a muted market reaction works against dealmaking. Both sides will then be playing against what happens when Treasury has to cut payments and limits spending to tax receipts. With Timmie in charge, the last thing he would not pay is Treasuries, and presumably Social Security is his second priority. But the next threat to the officialdom is what oxen get gored when Treasury has to halt payments and how the public reacts. And the other sword of Damocles is a rating agency downgrade. As we and others have noted, this did not affect Japan’s ability to fund cheaply (an item somehow missing from the discourse is that a central bank for a sovereign currency issuer can control yields across the entire yield curve if it wants to; note I’m not saying that that’s great policy, merely that it can be done). And the reports of the last few days indicate that a lot of players who are in theory required to hold all or a certain portion of assets in AAA instruments are getting waivers or otherwise reorienting their lives so as to be able to continue holding Treasuries. That is a long-winded way of saying there are likely to be disruptions, but there is reason to think they will fall short of doomsday scenarios (I’m also skeptical of catastrophic fall of the dollar worries, which is different that expecting the dollar to fall over the longer term. China has a currency band which has a significant dollar component; their peg commits them to buy dollars. The yen is in nosebleed territory relative to the dollar and the Japanese would likely intervene if it gets much higher than it is now).

But the flip side is that the game board has been set up so that there are no winning outcomes for average citizens. Drastic government budget cuts in a deleveraging economy are the equivalent of wearing a hair shirt. That approach has made debt to GDP ratios worse in every country that has tried it in Europe. The brinksmanship, if it leads Treasury to have to stop sending checks, is going to hit the economy harder, faster, both via the direct economic impact and the damage it will do to the mood of the public and businesses, than pretty much every other option under consideration. But the Dems aren’t wrong to be leery of short term kick the can down the road strategies that just assure more Republican efforts at economic hostage-taking. They are likely to lead to a downgrade (and if you doubt my not terribly alarmed view about that, which is contrary to consensus reality, then that is an outcome worth avoiding).

Robert Shiller’s work on bubbles and routs has found that bubbles typically end in the absence of real triggers (or more accurately, the “trigger” is the last buyer going in, which is not a readily observable event and the quasi or actual Ponzi becomes impossible to sustain any longer). The market is overdue for a correction. The banking system in Europe and the US is still on life support (via super cheap interest rates, regulatory forbearance, and other hidden subsidies). So on the one hand, a reversal of some sort is overdue. And the debt mess in the US might be the apparent trigger. I’ve been astonished at how long the officialdom has been able to keep asset values (save US housing) at levels that are out of whack with fundamentals. I’m loath to say that going past August 2 with no deal will break it, but if the lack of resolution goes much beyond that date, all bets are off.

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41 comments

  1. Heated Debate

    “The question is, how can a D. president put forth a R’ program? There has to be a crisis. Now in reality there is no crisis at all. But Wall Street doesn’t like real crises, so there’s an artificial non-crisis that Obama is treating as a crisis so that he can put forth the recommendations of the Deficit Reduction Commission to get rid of Social Security that he has supported all along. That’s the problem. He believes it.” – Hudson, Michael

    1. solerso

      So is thinking. You should try it sometime, presuming your an adult.It involves getting yourself reasonably well informed then using the information to form reasonable opinions…rather than alowing others (say, for instance, rush limbaugh) to do your thinking for you, then uncritically holding and repeating that persons’ opinions..like an 8 year child regurgitating whatever its parents say, without ever knowing why or what it means.

    1. solerso

      So is thinking. You should try it sometime, presuming your an adult.It involves getting yourself reasonably well informed then using the information to form reasonable opinions…rather than alowing others (say, for instance, rush limbaugh) to do your thinking for you, then uncritically holding and repeating that persons’ opinions..like an 8 year child regurgitating whatever its parents say, without ever knowing why or what it means.

      1. Yves Smith Post author

        You’ve just qualified yourself as a troll. No value added derision, twice in the same thread.

  2. Eagle

    It’s hard to gauge what the voters really think amidst all the noise, but I have to imagine that if this progresses to the point that mandatory spending abruptly stops, the public will blame Republicans. Then regardless of whatever concessions the Tea Party is able to extract from Obama, the wave of Congressional Democrats voted in next term can easily repeal anything unpopular.

    1. Glen

      Biggest problem the Democratic party has is Obama himself. If he pushes austerity through on a phoney-baloney debt crisis after dumping trillions on Wall St bailouts and no economic reform, we’ll see the Democratic Senators and Representatives abandoning Obama to get re-elected.

      1. Carla

        @Glen: I agree that Obama is a very big problem for “Democrats.” But probably the bigger problem is that there is no “Democratic” party. The fact that Obama is in office and doing what he’s doing is pretty good proof. What a FARCE!

        That’s okay. Brings us closer to the revolution every minute.

  3. Univa Bui

    Congress routinely seeks and uses “emergency” war funding bills to spend without scrutiny, above what the administration requested in discretionary funding. With this kind of degenerative masturbation, voters are held captive in a state of suspended disbelief.

  4. Cedric Regula

    Yves, I think you meant the other way around?

    “The dollar is in nosebleed territory relative to the yen and the Japanese would likely intervene if it gets much higher than it is now).”

  5. F. Beard

    The sooner the US learns it has no need to borrow its own currency, the better. What is the national debt but an unnecessary gift for the rich and bankers?

    The US needs to get principled about money creation if we hope to keep up with the younger and more numerous adopters of our banker fascist model.

    Hopefully necessity will compel US to do what is right anyway.

  6. Zigfried and Boehner

    “We’ve Gone from a Nation of Laws to a Nation of Powerful Men Making Laws in Secret” – Washington’s Blog

    1. Ming

      This debate debacle between the Republicans and the Democrats will
      will have one unfortunate ‘cultural’ outcome on  the ordinary citizen; it reinforces the view that big government is fiscally incompetent and unable deliver on it’s social obligation. Furthermore,it would foster distrust among the citizenry that the US governemnt could introduce any new initiatives on a fiscally sustainable basis. The result is a citizenry that would be likely to oppose any new forward thinking initiative by the US governemnt, unless it is a program that can be easily understood, such as defense. This debacle reinforces the Tea Party narrative, that less government is good, and that big government cannot be trusted. 

  7. Jesse

    Awkward phrasing, late night, sorry.

    I meant to say that while it is above 1320 the stock market does not really give a serious budget impasse credibility, believing in some sort of a short term deal to at least kick the can and all that.

    If stock futures break below 1300, the angst will grow geometrically in DC and Wall Street.

  8. Victor

    I’m glad to see you’re amused by all the posturing, Yves. So am I. What amuses me even more is how easy this would be for Obama, if only he knew something about poker. For one thing, you never dare your opponent to call your bluff. You call HIS. IMO the Republicans are bluffing. They’ll never allow the USA to default, it would hurt too many of their billionaire patrons. If I were Obama, here’s how I’d play these cards: http://amoleintheground.blogspot.com/2011/07/debt-ceiling-poker.html

  9. ArkansasAngie

    “But the flip side is that the game board has been set up so that there are no winning outcomes for average citizens”

    Maybe … maybe not.

    The problems caused by not raising the debt ceiling are unknown. But … don’t forget about the people who are getting hurt right now.

    Anybody living off interest is being scalped.
    Main street hasn’t gotten the bailouts. Bailout money isn’t being loaned out to small business now.

    And … how long are we talking? Right now the country is coming to a halt because they are arguing over 2.5 trillion dollar … over 10 years … And we’ve already been in it for what … 5 years? I don’t agree to this nonsense.

    I contend that the bad from getting these yahoos to stop is not worse that what we we’ve already got. Just different winners and losers.

    This hickie belongs to Washington and Wall Street — they should be the losers.

  10. Benedict@Large

    Any delay is good news, as it provides additional time to prove the “national debt” is a made-up number and should not be taken seriously by any person with self-respect. We’re not on the gold standard anymore, and anyone (like Uncle Milty) who wants to put us back there should be keep occupied with Tinker Toys while the rest of us try to get something real done.

    1. Yves Smith Post author

      So far, this is noise. Anything less than 1.5% down on the S&P is noise.

      I am so pissed I can no longer see the full yield curve on my poor person Bloomberg (they took that away last month), but the 10 year is UP. Dollar down but pretty trivially against most currencies.

      I think Mr. Market correctly infers there will be no Treasury default (over Timmie’s dead body) but if he has to cut other spending and this drama goes too many acts, the real economy hit will not be pretty. A couple of days of shuttered operations will piss a lot of people off but won’t do real damage. More than a week and we have really badly entrenched positions, the economic equivalent of the Battle of the Somme.

      1. Cedric Regula

        Yup. Pretty ho-hum so far. I read somewhere Timmy has 7-10 days of pad in his back pocket after Aug 2, so if they get whatever done next week nothing gets interrupted because they will have the time to have someone printup up a bit of money so the Treasury can do another t-bill auction. But it’s all in the timing, of course.

  11. TC

    All I know is Treasury’s debt MUST go parabolic in order that debt swelling the financial system once supported by “economic activity” no longer possible for want of confidence — that generated in the workings of Ponzi finance — does not implode and precipitate a chain reaction collapse. Thus, the present debt ceiling exercise and accompanying attempt to free up a bigger slice of the U.S. Treasury’s wherewithal aims only to forestall inevitable calamity. Yet the longer this effort persists the more glaring will be the parallel with 1923 Wiemar Germany, as margins continue their collapse, capacity contracts further, shortages abound and want unlike anything anyone living has ever seen becomes commonplace.

    Yet the greatest risk presently is another staged act of terrorism a la 9/11 whose effect could serve to rationalize policy decisions bolstering present attempts to sustain the unsustainable with bone crushing sacrifice imposed upon a thoroughly demoralized citizenry.

  12. TC

    My read of the 10-year U.S. Treasury finds likelihood that, yields will continue coming in as long as more hyperinflationary liquidity is not forthcoming. Since 2008′s kickoff of Ponzi Finance Fail Treasuries have come under pressure only when liquidity was forthcoming from the U.S. Treasury and/or the Fed. Whenever provision of added gobs of liquidity appeared in doubt the increased risk of debt collapse appears to have had the effect of driving capital into Treasuries. Thus presently, too.

    Equities? Toilet paper. Wildly overvalued. It is a fairly easy exercise to look under the covers and discover confidence is shattered. I am of the conviction that, another “flash crash” likely is forthcoming, and its chaotic effect could go on for days, if not weeks.

  13. Paul Tioxon

    The national cash flow needs to go towards the core functions of the state. Our primary source of power in the world is military at this point. No one can catch up with us without diverting too much investment in unproductive military hardware. And unless you really plan on using it, just having it is a luxury we used to be able to afford, but China can’t right now. And business does not look like it’s ready re industrialize. So the Capitalist Line of Global Demarcation has the military power with the WEST and the business center in the East. It looks like they are ready to bring the majority of the citizenry in America down to a standard of living from pre WWII levels, in order to maintain the military establishment at state of the art readiness.

    But the fallout is social and political chaos, with various attempts at gaining some sort of power, such as the tea party take over of the republican party, resulting in the counterproductive assault on the money making machine of the worlds reserve currency. There will probably not be a big blowup, because there has been no structural alteration in the alliance between private capital and the state. But if business interests keep interfering with the operation of the Federal Government on a repeated basis such as we currently witnessing, there could be a reaction against private capital to maintain the status quo. What happens to the middle class is irrelevant to the profit making machine of global capitalism, as quarterly returns seem to indicate. Only a weakening of the national capacity to support the military establishment as the global protection provider of private capital in Europe and The Asian Capitalist Archipelago and certain energy assets in the Middle East would provoke a definitive overt movement to stop the crazies. So far they have not done enough real damage to the people who count. That does not include us, anytime soon or in the near future. It is not only economics that trickles down, but political power. I am not sure there are enough people to pile into the democratic party, in the manner the tea party has done, to make waves for the people. I am not even sure if people can tell personality choosing events from power, or what policy is good for them or what hurts them. But the chaos that is spreading is measured by more and more peoples inability to be able to calculate from their decisions and behavior what the consequences will be in the future. And the inability to make reasonable assumptions, to have confidence that a job will last more than 5 years, a home can be affordable enough to buy with a thirty year mortgage, or that even medical care or a pension will waiting when I reach sixty or seventy or whenever, if it all, is a guarantee for the worst kind of political reaction from the bottom, in terms of voting, acting out criminally and worse.

  14. Fraud Guy

    I don’t think the “Debt Ceiling Armageddon” narrative will work with the public multiple times in the span of months.

  15. Doug Terpstra

    “’If we stick together, we can win this for the American people,” Boehner told his troops.’”

    The “muted market reaction” is logical given that insiders know that this game of the game of chicken is being played expressly for the casino and that Boehner’s rousing martial oratory is implicitly about looting the American people for their benefit. The racketeers will never allow such Shock Doctrine psy-ops to actually threaten the casino itself. (Except of course for the fact that market fundamentals are so out of whack and have been for years now and are only waiting for a butterfly to land).

    The Onion has the clearest analysis on this:

    “Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined.”

    http://www.theonion.com/articles/congress-continues-debate-over-whether-or-not-nati,20977/

    “Members of the U.S. Congress reported Wednesday they were continuing to carefully debate the issue of whether or not they should allow the country to descend into a roiling economic meltdown of historically dire proportions. ‘It is a question that, I think, is worthy of serious consideration: Should we take steps to avoid a crippling, decades-long depression that would lead to disastrous consequences on a worldwide scale? Or should we not do that?. asked House Majority Leader Eric Cantor (R-VA), adding that arguments could be made for both sides, and that the debate over ensuring America’s financial solvency versus allowing the nation to default on its debt—which would torpedo stock markets, cause mortgage and interests rates to skyrocket, and decimate the value of the U.S. dollar—is ‘certainly a conversation worth having.’”

    . . .

    “At press time, President Obama said he personally believed the country should not be economically ruined.”

    The messiah cometh.

  16. Economatrix

    “I’ve been astonished at how long the officialdom has been able to keep asset values (save US housing) at levels that are out of whack with fundamentals. ”

    Let me correct, this:

    “I’ve been astonished at how long the officialdom has been able to keep asset values (save non California US housing) at levels that are out of whack with fundamentals.”

    California real-estate especially places like Pasadena, Culver City and most of the LA/San Diego/San Jose-SF areas are out of whack with fundamentals. The prices they want for CRAP in my current neighborhood, despite sitting on the market for months is ridiculous.

    For those in the Pasadena/San Gabriel Valley area of LA, there is a townhouse project just south of California on Lake that is STILL trying to convince people to pony up about a million (reduced from 1.2M) for a TOWNHOUSE in Pasadena built with migrant labor. Never mind you can get a real HOUSE in San Marino, a small city ordes of magnitude more exclusive for less, minus the high end Home Depot fixtures though…

  17. The lives of others

    The debt debate etc proves that economics is not a science. Not because politicians disagree, but because economists disagree, in spite of the fact that their theories are testable and have been tested (according to the economists themselves. Lots of graphs and data).
    In other words, economics is not a dismal science, it is just dismal. I no longer blame the US public for not paying any attention.
    PS. This a view from outside economics.

  18. ep3

    Again Yves, you are correct. Since this whole mess is gonna involve a fundamental re-write of SS and Medicare (especially), the officialdom wants to use the TARP form of roulette to force these changes.
    As digby says, we are so far down the rabbit hole, we will never see the light of day.
    Are ppl really that stupid to think that “oh another crash won’t hurt, let it all fall”? Is it because once the ripple effects hit them, then they can cry about it being the fault of unions, illegals, lazy black ppl, etc.?
    If the entitlements (yes, I am entitled to them. I paid in for all these years.) have to be cut, I want to see current retirees take a hit too. But Obama’s plan (and most other powers that be) is to avoid the short term and long term political effects of these cuts. So in 10 years, when these magical debt problems and health care inflation problems are still with us in some form, more pain can be inflicted on poor people. But the citizenry’s short term memories will block out most everything, as well as not make the connection between their current failures and previous terrible administrations.

  19. JTFaraday

    It’s clear that Boehner wants this as an issue in the 2012 election, with multiple temporary extensions.

    I had CNN on briefly last Friday, and saw his press conference. He was saying that there are clear differences between the two parties and that we have those two parties for a reason. The issue of public spending *should* be on the agenda in 2012 so that the public can decide which approach it prefers.

    I’ve long been saying that Obama traded away so much that there was nothing left on which he could run in 2012. Here’s Boehner actually giving him an issue to run on.

    Alas, it’s too bad that when Obama put Medicare and Social Security on the chopping block the other week, he prematurely threw that one away too. Even the Republican “keep the government’s hands off my medicare” base wants to defend that, given their negative reaction to Paul Ryan’s privatization plans, which Boehner surely knows.

    This tendency to give away the whole farm has finally put Obama himself in a no-win situation and Boehner seems determined to keep him right there.

    1. hermanas

      Pres. Grant said battle success was getting there first with most.
      My local banker says S.S. recipients are alerted.

  20. Birch

    Isn’t a hair shirt simply a wool sweater? I don’t get that analogy. What’s wrong with wearing sweaters? I’m missing something there.

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