No, debacle is not too strong of a word. That Congress and the President let it get this close to the wire – again – is a disgrace. Yes, I believe there will be a deal but not because the bond market is not worried. After all, any deal or non-deal will not stop interest payments from being made. And Grandma should not worry either because, again, even without a deal there will be enough money to pay her SS check.
So, no, we will not default on contracts. We will, however, not have enough money to spend on all the programs that we may or may not need if no deal is struck. Did you notice the breakdown in the US Dollar Index today? Better find a handbasket to ride.
The ratings agencies, for all their flaws and warts on the housing crisis, are telling us something. The USA has a greater than 50% chance of being downgraded anyway, even if the debt ceiling is raised and everybody sucking at the government teat gets their fill.
Wall Street is already preparing for the downgrade as it checks out its holdings. The hidden cost is everywhere because Treasuries are often used as collateral for financial dealings. What happens if the collateral is suddenly not such high quality? Will loans get called early? Will deals in progress get pulled?
And what happens to all sorts of lending rates that are tied to Treasury yields? Your mortgage might get a rate bump.
And even worse, what happens to the value of short-term Treasury securities held in money market funds? If you thought one fund company breaking the buck a few years ago was bad, this will be worse.
Again, I think there will be a deal and Armageddon will be avoided – or at least kicked down the road. But the problem remains where it always has been – with politicians and their only goal of getting reelected.
