This is your captain speaking…
When you’re on a commercial flight, and the plane is approaching turbulence, the captain comes on the intercom to let you know to buckle up and expect “rough air." There should be similar warnings about “rough air” in the markets, and this is a good time to offer one.
The market turbulence that we see approaching is a consequence of the debt ceiling debate – or, rather, the refusal of Congressional leaders to agree to raise the limit on the amount of bonds the government is allowed to sell to finance its operations. The legal limit on the amount of Treasury debt that the government can issue is periodically raised – and it is always because Congress has already authorized a budget that will exceed the debt limit.
Yes, you read that right. Congress created a gap between revenues collected and expenditures, and now is threatening not to authorize the payments that were approved. Don’t try this at home.
Of course, this is a political issue, as are all things in Washington. Republican leaders, who control the U.S. House of Representatives, believe that their colleagues on the other side of the aisle will be so appalled at the idea of the wealthiest nation on earth defaulting on its fiscal obligations to bondholders, Social Security recipients, and government employees that they will be willing to negotiate Republican-proposed spending cuts, including reductions in federal health care, science, and education. Among the few specific proposals is a rule requiring low-income Medicaid recipients to work for 80 hours a month, blockage of the proposed student debt cancellation, and a repeal of a variety of green energy initiatives. The most contentious proposal would scale back medical benefits for military veterans.
Ironically, the Democratic budget proposal would reduce the federal deficit, over the long-term, by $3 trillion. But instead of budget cuts, it would raise the highest corporate tax rate from 21% to 28% and impose a 25% minimum income tax on billionaires. The proposal would also raise the highest tax rate for couples earning more than $450,000 to 39.6%. I’m not here to argue the merits for either side of the aisle.
But how likely is a default? The U.S. government actually hit its maximum debt ($31.38 trillion) on January 19th, and has since been relying on accounting tricks like deferring pension investments in order to keep the doors open and the bond payment checks from bouncing. We are now on a near-approach to what insiders call the “x-date,” the unspecified time when those measures will be insufficient, and the government will have to start deciding who to pay and (more to the point) who not to pay out of its diminishing resources. It’s worth pointing out that previous debt-ceiling brinkmanship caused credit agencies to lower America’s credit rating – once the highest in the world.
You can bet that quick-twitch traders, whose activitie
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