Tuesday, October 15, 2013

Waiting for the default that’s already here


THE GRAND Guignol performance we’ve been seeing on Capitol Hill recently is apparently set to go on for a few more acts. On the edge of resolution of the debt-default impasse, House Republicans revealed their addiction to chaos on Tuesday, when the House Republican conference submitted a bill that would end the government shutdown and resume the government borrowing authority but hamstring certain aspects of the Affordable Care Act — a nonstarter in the Democratic Senate.

This instead of moving forward on a bipartisan Senate proposal hammered out in recent days by Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.

The House plan funds the government through Jan. 15, raise the nation's borrowing authority through Feb. 7, postpone Obamacare's medical device tax by two years, and eliminate federal health care subsidies for members of Congress.

Reid was blunt about its prospects this morning in the Senate: “This bill that they're sending over here is doomed to failure.”

House Speaker John Boehner said pretty much the same thing, in more roundabout language. “There are a lot of opinions about what direction to go. There have been no decisions about what exactly we will do,” he said at a press conference. “We are going to continue to work with our members on both sides of the aisle to try and make sure there is no issue of default and to get our government reopened.”

NBC News reported what House Democratic Leader Nancy Pelosi said this morning, exposing just how empty the House effort is.

“What you saw here earlier ... was a Speaker who did not have the votes for his proposal,” she said. “This Republican habit of sabotaging any effort to move forward is a luxury our country cannot afford.”

This latest in the kabuki madness attending what could be the most serious financial crisis in modern American history seems mostly motivated by House Republicans looking for a trophy, an ear from the bull, something to take home to the most conservative members of the base, something more symbol than substance to show for an effort at governmental obstruction that was a fool’s errand from the jump.

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But all of this may be rearranging the deck chairs on a target ship. To go by the assessment of one veteran financial writer, Felix Salmon, financial writer for Reuters, the real-world impacts of a United States debt default are not a future-tense proposition. They’re underway right now.

“The U.S. government is already in default on its obligations,” Salmon wrote on Monday.

“Right now, with the shutdown, we’ve already reached the point at which the government is breaking very important promises indeed: we promised to pay hundreds of thousands of government employees a certain amount on certain dates, in return for their honest work. We have broken that promise. Indeed, by Treasury’s own definition, it’s reasonable to say that we have already defaulted: surely, by any sensible conception, the salaries of government employees constitute “legal obligations of the U.S.”

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SALMON CONTINUES: “The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors. If you needed that interest payment, you could always just sell your Treasury bill instead, for an amount extremely close to the total principal and interest due. Rather, the harm done would be a function of the way in which the Treasury market is the risk-free [V]aseline which greases the entire financial system.

“If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The U.S. government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there.”

Salmon cites one of the two more widely known examples of institutional abandonments of U.S. short-term debt — he only mentions Fidelity’s sale of its short-term T-bills, but JP Morgan Chase did much the same thing last week —and adds a third one, quoting from the Wall Street Journal:

“Reich & Tang, which oversees $35 billion, including $17 billion in money-market funds, said that the firm isn’t holding any U.S. securities that pay interest at the end of October through mid-November...”

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Salmon again: “The [V]aseline, in other words, already has sand in it. The global faith in U.S. institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the U.S. and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive. ...

“The Republicans in the House have already managed to inflict significant, lasting damage to the U.S. and the global economy — even if they were to pass a completely clean bill tomorrow morning, which they won’t. The default has already started, and is already causing real harm. The only question is how much worse it’s going to get.”

You can see for yourself how bad it is right now. Time.com has put together a sadly handy interactive that shows where the money’s going in near real-time. Click here for a glimpse at the only countdown clock that matters.

Image credits: Boehner: Associated Press. Pelosi: via MSNBC. Fidelity logo: © 2013 Fidelity Investments. Reich & Tang nameplate: © 2013 Reich & Tang Asset Management.

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