On January 7th this year, President Obama warned Congress of ‘catastrophic economic consequences’ if Congress didn’t raise the debt ceiling the Fed is allowed to have. (The Fed must agree this with Congress, otherwise under the constitution it can’t borrow any more money).
Congress now has far more GOP and Tea Party members than it had before the November elections. Thus far they are saying that without mega-cuts in Federal spending, they won’t raise the debt ceiling.
James Pethokoukis of Reuters posted an interesting piece yesterday pointing out that if Republicans took the fall for making Uncle Sam look as though he might default on his obligations, it would do them no good at all. But the GOP can’t control its new Tea Party colleagues. They say they want to radically shrink the federal government in exchange for acceding to raising the debt ceiling. At $14.3 trillion currently, the limit could easily be reached within two months.
Obama publishes his Budget in a fortnight. In the meantime, following The Slog’s post last week about the US 30-Year Fed Certificate yield, I was amused this morning to see the FT reporting how Bernanke is being ‘urged’ to issue 100-Year Bonds. Now that could turn kicking the can down the round into an Olympic sport.
The Treasury Borrowing Advisory Committee (TBAC) apparently contains at least one feisty member who thinks this is a cracking wheeze, in that it would ‘reduce overall funding risk’ because ‘significant demand exists for high-quality long duration bonds’.
Pardon me for thinking, but I feel some social anthropology needs to be added to the logic equation here.
Why would a Bond investor with doubts about long-term US viability (in the light of near-zero attention to the country’s deficit) want to get a lower yield? I mean, why would that person see the purchase as lower risk?
I’m not sure I’d expect the USA to be a First World Nation – or even exist – in 2111.
Surely, the more risky a sovereign debt gets, the harder it is to sell the market longer-term bonds. Didn’t Greece, Ireland, Portugal and Spain teach us that?
Happily, I don’t think this is just me: Assistant Treasury Secretary Mary Miller told a post-TBAC leak press conference yesterday that “it doesn’t make sense to consider a 100-year bond”.
Perhaps the problem is the funny-farm folks who sit on the TBAC. There are 13 of them, and the vast majority work at…….Goldman Sachs, JP Morgan Chase, Morgan Stanley, RBS, and Bank of America. The usual list of suspects, then.
Yup, I think that might explain it. You see, those wishing to screw creditors often assume they have an IQ in single figures. Sadly, when it comes to the Tea Party people, they may well be right.
A gridlock between Congress and the White House isn’t going to be good for anyone other than a nihilist. And it certainly isn’t going to help the Bond yield on 30-Year debt. As I said last week, keep your eye on it: 5% is the dangerous level.