The Debt Ceiling Limit – Still There

“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.” – Milton Friedman

It’s 26 May 2011, and the U.S. federal debt ceiling still hasn’t been raised. Will it? I’m not sure. I suspect it will, but I can’t say for sure, or when. I’d like to offer three observations on the topic: current market predictions, underlying political cowardice in the argument, and the Obama administration’s best re-election strategy (which I’m sure they knew long before I figured it out).

Current Market Predictions …

We commented on the debt ceiling back in mid-April with “Everybody Pee Before We Get in the Car.” At the time, we were considering the need for those receiving a check from the federal government to make some modest preparations just in case we do have to go through an immediate budget balancing dance (more on this later). We also noted the intrade predictions for borrowing limit increases by various dates, which we’d like to update now:

  • Midnight, 31 May 2011:  (April 18) – 24% / (Now) – 2%
  • Midnight, 30 June 2011:  (April 18) – 75% / (Now) – 11%
  • Midnight, 31 July 2011:  (April 18) – 85% / (Now) – 27%

The curve has certainly shifted downward. On 18 April there was a predicted 85% chance that the debt ceiling would be increased by 31 July 2011 … that number is now down to a 27% chance. (Note there is still a 65% chance of an increase by the end of August, and a 75% chance by the end of September. So the betting group still believes a better than 50-50 chance that we avoid the hard limit.)

Underlying Political Cowardice …

I would like to note that I actually agree with one of the arguments put out by the political left on the issue. The threat to hold the debt ceiling “hostage” is not based on paring back new federal spending – the money is needed to pay for spending that has already been approved. If the Republicans want to take a stand on the absolutely out-of-control federal deficit, they should do it in a budget debate, not a borrowing limit debate. These guys voted for the spending bills that resulted in the need to borrow more money, but are now grandstanding on the debt ceiling to score political points. This is political cowardice. Make a stand when it the real issue is on the docket.

Now, I think the situation in this country is so dire, that I’m not put off by these grandstanding tactics. Something needs to be done, and if this is the only way that politicians can summon enough courage to take a stand, then so be it.

Having said that, I doubt the Republicans will actually score political points with this.

The 2012 Election for Obama …

I have a theory that the main difference between George W. Bush and Bill Clinton is their respective abilities to stave of disaster for the next guy. Each president oversaw a massive asset bubble (largely induced by the federal reserve): Clinton with the dot-com bubble and Bush with the housing bubble. That said, Clinton was able to keep his bubble inflated long enough to get out of office, leaving Bush to deal with the mess. Bush fell short by a bit, and faced the collapse on his own watch. In both cases though, the president took a collapsing asset bubble (a.k.a. the “political anchor”), handed it off to the next guy and said “have fun swimming with that.”

Obama has found the sledding a bit tougher though. The downfall of the Clinton bubble wasn’t nearly as dramatic (perhaps because it wasn’t nearly as bad) as the Bush bubble. There has been no time for Obama to successfully re-inflate, we haven’t fully deflated yet.

Even still, there is an election around the corner, and the American people probably won’t be interested in hearing arguments about how bad the situation was that Obama inherited from Bush. There is little chance for an economic turnaround in time to save the election (unemployment has stalled at 9% and may even tick upward for a while). What’s a politician to do?

Well, the “anchor” is still out there, so you have to find a way to hand it off to the opposition and let them swim with it for a while. But how? How can you convince the public that the economic echo collapse is the fault of the Republicans? I’ve got it! Paint them into a corner where they have to demagogue the debt ceiling, all the while demagoging it yourself by declaring that a “default” would crush the economic recovery (already well under heel). If they do hold tight on the ceiling, instruct Geithner to default (even though he doesn’t have to – there will be plenty of money to service the debt), forcing an interest rate spike and economic mayhem. How much of the mayhem would have come sooner-or-later anyway because of unsustainable policies? Who knows … who cares? The anchor has been handed off, and the game is afoot.

I have to say, I think Obama has the Republicans nailed on this one. We’ll see if they have any tricks up their collective sleeves … recent history shows plenty of reason to doubt it though.

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