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Friday, October 8, 2021
Keep it or scrap it, Washington should stop playing chicken with the markets
“...Goodness knows what the end will be;
Oh, I don't know where I'm at;
It looks as if we two will never be one;
Something must be done...
Let's call the whole thing off!”
That old classic song, sung alternately by Fred Astaire, Billie Holiday, Ella Fitzgerald, Bing Crosby and — most recently, by Spiderman's nemesis Venom — pretty much sums up the exhausting and performative furor about the government hiking its borrowing limit.
On Thursday, U.S. Senators approved legislation that effectively kicks the debt-ceiling can further down the road to December. At that point Democrats and Republicans will need to somehow muster the resolve they couldn’t find now (just in time for Christmas, as if we needed any more volatility-inducing uncertainty around the holidays), in order to avert reaping the whirlwind of its own indiscipline.
And with all due respect to Bloomberg’s Joe Weisenthal and other denizens of the “Mint the Coin” movement, a $1 trillion government I.O.U. to the Federal Reserve is highly unlikely to save the day (but more on that in a few).
And barring the implementation of what Treasury Secretary Janet Yellen dismissed as little more than a gimmick, the road to an eventual resolution is probably paved with more whipsaw market action.
“The 2011 debt-ceiling episode led to a spike in the VIX volatility index and to a massive 10% plunge in stock prices, “ noted Gregory Daco at Oxford Economics. While quickly reversed once the debt ceiling was raised, we shouldn’t discount the risk from rapidly tightening financial conditions and the knock-on effects on private sector activity.”
Which begs the question: Why exactly do U.S. officials keep doing this to the country, especially when investors are already trying to catch way too many falling knives?
It makes one believe that JPMorgan Chase CEO Jamie Dimon is on to something when he flatly declared that Washington should just do away with the entire debt limit spectacle.
Rattling off a list of reasons why the debate was unworthy of the world’s largest economy, Wall Street’s longest-serving bank CEO said that “we should get rid of this debt ceiling — we don't need to have this kind of brinksmanship every couple of years."
At least one Republican Senator summarily dismissed Dimon’s suggestion, but JPMorgan’s head honcho is hardly alone. His argument was echoed by a Bloomberg editorial that basically made the same thrust.
“It’s clear by now that the risks posed by the debt limit far exceed its theoretical benefits,” the editors wrote. “No other country routinely toys with defaulting on its obligations. Enough.”
Again, paraphrasing the old song, shouldn’t we just call the whole thing off?
“The intent originally was to provide some discipline on the spending side of the equation, but if you’re going to keep extending the debt ceiling anyway, then what’s the purpose?” Kevin Flanagan, head of fixed income at WisdomTree, told Yahoo Finance in an interview.
Congress, of course, doesn’t appear to have the “wherewithal” to do the obvious — which means that “we’ll be going through this again in six weeks or so,” Flanagan said. He added that as we get closer to the “drop-dead” date in December, shorter-dated Treasury bill yields will likely shoot up, reflecting the uncertainty.
So absent a dramatic Congressional intervention, could a $1 trillion coin really be our way out of the endless debt limit dance? Well, no — and the political class’ own penchant for fiscal incontinence is the reason why, some argue.
“There is a risk that minting a $1 trillion coin — even if specifically to avert a debt-ceiling induced default — would open Pandora’s Box,” noted Andrew Hunter, Capital Economics’ senior U.S. economist.
“With the Treasury assuming authority for creating money, there would be nothing to stop more coins being minted to address future ‘crises’” manufactured by both major parties, the economist wrote in a recent note.
“More generally, it may not be long before a future president used a coin to circumvent Congress entirely. In that context, minting a $1 trillion coin now might end up being the first step towards a full-blown embrace of Modern Monetary Theory, and much higher inflation, further down the line,” he added.
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