{"id":58162,"date":"2023-01-26T09:00:01","date_gmt":"2023-01-26T14:00:01","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=58162"},"modified":"2023-01-25T17:49:40","modified_gmt":"2023-01-25T22:49:40","slug":"treasury-default-hysteria-begins","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2023\/01\/treasury-default-hysteria-begins\/","title":{"rendered":"Treasury Default Hysteria Begins"},"content":{"rendered":"

While fights over Supreme Court and Federal Reserve Board nominations come sporadically as vacancies arise, there is one political battle we can almost always count on from year to year, and that is the struggle over extending the federal debt ceiling. <\/p>\n

If it\u2019s not increased, we\u2019re told, the U.S. government will default on its obligations, Social Security and other government program beneficiaries will be rendered destitute, Treasury bondholders will see the value of their holdings decimated as they go without their interest payments, our soldiers and other government employees won\u2019t get paid, and the global financial system will grind to a halt.<\/p>\n

Most serious-minded adults, however (I hope), have learned to ignore this annual game of chicken that the White House and Congress insist on playing every year, although the financial press and media commentators profess to take it seriously. <\/p>\n

Whichever political party controls the White House or the houses of Congress, the drama generally follows the same predictable format, namely the Democrats always favor raising the debt ceiling to avoid the catastrophes described in the first paragraph, while the Republicans express opposition in the name of fiscal responsibility. <\/p>\n

<\/div>\n

Yet no matter how long the drama plays out, the outcome is always the same: the Republicans eventually knuckle under, life goes on and everyone gets their money, until the next debt debacle. Lather, rinse, repeat.<\/p>\n

This year, it seems, the play has begun early. <\/p>\n

Five whole months before the government allegedly runs out of money without a debt limit increase, Treasury Secretary (and former Fed Chair) Janet Yellen has already sounded the alarm and instructed her troops to put in place \u201cextraordinary measures\u201d to allow the government to keep paying its bills before it hits the current $31.4 trillion debt limit in June. <\/p>\n

Yellen wasted no time in using the dreaded D-word to emphasize the supposed seriousness of the situation. <\/p>\n

\u201cA failure on the part of the United States to meet any obligation, whether it\u2019s to debtholders, to members of our military or to Social Security recipients, is effectively a default,\u201d<\/em> she said.\u00a0<\/p>\n

She also quickly dismissed suggestions that should the debt limit not be raised in a timely fashion the Treasury would be able to prioritize payments to recipients, be they bondholders, senior citizens or soldiers. <\/p>\n

\u201cThe Treasury\u2019s systems have all been built to pay all of our bills when they\u2019re due and on time, and not to prioritize one form of spending over another,\u201d<\/em> she said last week. <\/p>\n

I find that a little difficult to believe \u2014 every computer system in the world can be modified to accommodate some hiccup or another \u2014 but her comment went unchallenged.<\/p>\n

One thing I\u2019ve always found amusing about the whole annual debt limit-default drama is the market\u2019s reaction to it, which is generally no reaction at all or the one you would least expect to happen, namely investors rushing to buy the very instrument that is supposedly being defaulted on, i.e., Treasury bonds. <\/p>\n

If you knew a country or a corporation might default on their debt obligations, your first instinct would be to avoid them, wouldn\u2019t it? <\/p>\n

Yet, the closer we ostensibly get to a U.S. government default, the market reaction is to buy Treasuries, under the time-honored flight to safety. <\/p>\n

That alone should tell you how seriously to take all this. No sensible person believes \u2014 or should believe \u2014 that the U.S. government is going to default, no matter how much scare talk comes out of Washington. Ain\u2019t gonna happen. <\/p>\n

But stay tuned. We\u2019ll no doubt be hearing more about this as doomsday approaches. Try not to let it disturb your sleep or influence your financial decisions.<\/p>\n

Meanwhile, we have a Fed meeting announcement to prepare for next Wednesday.<\/p>\n

Compared to the Fed\u2019s 2022 meetings \u2014 during which it raised interest rates seven times by a total of 425 basis points \u2014 next week\u2019s meeting should be relatively uneventful and fairly predictable. <\/p>\n

<\/div>\n

That is, we can probably expect the Fed to raise its federal funds target by another 50 bps, the same increase as the one at its previous meeting in mid-December following four straight 75 bp hikes. That would bring the fed funds rate to 4.75%, or close to where most people believe the Fed will end up.<\/p>\n

Given the recent softening in the labor market and moderation in the inflation rate, it certainly could be argued that the Fed should reduce the increase to 25 bps, although that doesn\u2019t seem likely to happen. <\/p>\n

The Fed doesn\u2019t want to send the message that it is losing its zeal to drive down inflation to its 2% target and giving in to just about everyone else clamoring for the Fed to at least pause its rate increases. <\/p>\n

Even a 25 bp hike would be seen as the Fed giving into pressure, so a 50 bp increase seems the most likely outcome, whether warranted or not.<\/p>\n

George Yacik<\/a>
\nINO.com Contributor<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

While fights over Supreme Court and Federal Reserve Board nominations come sporadically as vacancies arise, there is one political battle we can almost always count on from year to year, and that is the struggle over extending the federal debt ceiling. 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