The Debt Ceiling is Stupid

What is the debt ceiling?  It’s a relatively arbitrary limit set by Congress on how much debt the government can issue.  It’s a big deal now because the debt ceiling must be raised in order for the US government to meet its obligations and borrow more funds in the bond market.

If the debt ceiling isn’t raised, some or all of the following will happen:

• Government employees stop getting paid
• Government services are stopped
• Projects go on hold
• Interest payments aren’t made on current debt (US defaults)

The severity of each outcome remains to be seen.  The order in which this would occur is an uncertainty, with the exception of the interest payments on US issued debt. Despite what the press says, this will not lead to an immediate default on US debt, but debt payments would be made at the expense of the government salaries, services, and entitlements. At the very least our debt instruments would be downgraded by the rating agencies, because of the failure to pay and the uncertainty of payment.

Regardless I don’t think anyone could argue this would be a good thing given our current environment.  Any of these would further weaken the already weakening macro data (e.g. unemployment, manufacturing indexes, etc.) and certainly not be good for stocks. Of course if the interest payments aren’t made this could open up a whole new set of problems, mainly rising interest rates caused by a lack of confidence in the United States to pay their obligations.   The 30 day Treasury has long been used as a proxy for the risk-free rate of interest. 

Most commentators think this is going to happen and the market, while volatile, doesn’t appear to be signifying the debt ceiling won’t be raised.  That said, Congress seems to be full of idiots/ideologues so anything is possible and the longer it goes on the more uncertainty there will be in the market.