Andrew Ross Sorkin: No Way U.S. Would Allow Debt Default? Don't Bet on It
Comment of the Day

October 08 2013

Commentary by David Fuller

Andrew Ross Sorkin: No Way U.S. Would Allow Debt Default? Don't Bet on It

Here is the opening for this interesting and controversial column published by The New York Times (subscription registration is required but her is a PDF version)
"The United States government is not going to default, ever."

That's what Vincent Reinhart, former head of the Federal Reserve's monetary division and now managing director and chief United States economist for Morgan Stanley, said late last week.

"As political theater," he said, "the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default."

Mr. Reinhart's view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on Oct. 17. Warren Buffett put it this way: "We'll go right up to the point of extreme idiocy, but we won't cross it."

Nobody believes the country will actually exceed the debt limit - which is exactly why it might.

Oddly enough, despite all the predictions of panic, the stock market was down only marginally over the last couple of sessions.

Here's the perversity of Wall Street's psychology: The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn't reached.

John Podesta, the former chief of staff for President Bill Clinton, said that while only weeks ago he thought it was almost impossible that Congress wouldn't reach a deal, he now questions whether it will be reached in time.

What happens when the government exceeds the debt limit? It is often forgotten, but it actually did default once, in 1979 - but this was by accident.

David Fuller's view I agree with Vincent Reinhart but Andrew Ross Sorkin makes an interesting point. Moreover, the polarised positions of many Republicans and Democrats during this political impasse can easily lead to brinkmanship, especially if Wall Street is not overreacting.

That had been the case for levitating US indices such as the Nasdaq (daily & weekly) and Russell 2000 (daily & weekly) but they fell sharply today, led by internet stocks such as Yelp -10% (daily & weekly), LinkedIn -8% (daily & weekly), and Facebook (daily & weekly and Netflix (daily & weekly) which fell about 5.7%. These are most likely peaks of at least near-term significance for what had been a high-flying sector for at least several months.

President Obama and the Republicans would be very foolish not to agree to at least a short-term increase in the US debt limit before the 17th, to avoid a more damaging impasse and to allow talks on a compromise agreement to commence.

(See also yesterday's comments.)

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