Saturday, July 30, 2011

Conflicting voices about the debt crisis

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

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 default and buy time while a budget patch is passed.  The idea has been roundly ignored or dismissed as impractical.  Of course, the U.S. government also has over a trillion dollars worth of other assets much of which could be liquidated to pay bills, but that's another post.
Guy tilling soil in front of Financial Temple - Wikipedia

The debt markets have not been as restive as the equity markets.  Bond markets know that the administration would not pull the financial temple down on our heads and allow a default, because it is not in the politicians' interest to do so.  The Obama administration would have little choice but to play the payment sequencing card to avert financial Armageddon. 

Treasury Secretary Tim Geithner does not believe the Treasury possesses this ability.  A blog called points out the bluff by citing some July 25th reporting done by Charlie Gasparino.  

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."  Apparently, the rating agencies warn against doing this (the same folks that did such a fine job assigning risk before the housing market cratered).  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.

I'm listening to Bloomberg Radio and an interview with Mohamed El-Erian.  Dr. El-Erian understands the bond markets which at this juncture, are a more reliable indicator of danger than political sideshows that reap so much media attention.