The debt crisis and who to listen to

Disclaimer:
The official position of this blog remains that the United States does NOT have a revenue problem, it only has a spending problem. 

Here are thoughts on the debt crisis, our political stasis and some of the characters competing for your attention these days...

I spoke with Rep. Jim Sensenbrenner at a local Town Hall Meeting last April about an idea advanced by Tim Pawlenty to avoid default without raising the debt limit.  The U.S. Treasury has the power to sequence (i.e. prioritize) payments when bills come due.  So debt holders can indeed be paid first to avert any default and buy time while a budget is passed.  The idea has been roundly ignored, disbelieved, or dismissed as impractical.  Of course, the U.S. government also has over a trillion dollars worth of other assets much of which ought to be liquidated to pay bills, but that's another post.

Guy tilling soil in front of Financial Temple - Wikipedia

The debt markets have understood this safety valve all along, which might be why they have not been as restive as the equity markets.

Bond markets know that the administration would not pull the financial temple (picture right >>) down on our heads and allow a default, because it is not in their political interest to do so.

Since the rest of the public is learning that this is the case, the Obama administration would have no choice but to play the payment sequencing card to avert disaster.  Disaster is defined here not as the default itself but rather, the political fall-out from failing to stem one. 

Now, who not to listen to...policy voices like that of our Treasury Secretary Tim Geithner that will have you believe the Treasury does not possess this authority or ability.  A blog called FairlyConservative.com points out the big bluff by citing some July 25th reporting done by Charlie Gasparino.  Again, I am astonished at the lack of broader attention paid to reports from people like Gasparino, when these stories break. 

What happened two days ago?  Bloomberg News and others reported that "...the Treasury Department will disclose its list of spending priorities in the event the debt limit isn't raised before August 2nd."  Shazaam!!  Of course, the rating agencies "warn" against doing this (yes, the same guys that did such a fine job assigning risk before the housing market cratered).  Why are we listening to them?  Because they can issue a temporary credit downgrade?   In the macro-scheme of things, it really wouldn't matter much according to David Wessel, and others. 

I don't want a credit downgrade to occur like Neil Cavuto and I understand the impact on our borrowing costs, but it might be more of a political risk than an economic risk which is a view expressed rather well in this blurb from Politico.

Finally, if you want to know where to go to monitor these events, I recommend listening to Bloomberg Radio when it interviews people like Mohamed El-Erian.  El-Erian is someone who understands the bond markets which, at this juncture, are a more reliable indicator of danger, than political sideshows which (unfortunately) still reap too much media attention.