Wednesday, January 12, 2011

The debt ceiling battle - no solution but a bad debt meme

One of the reasons for the sell-off in Treasuries over the last two weeks is the uncertainty concerning the statutory debt ceiling not being raised. Of course, it will be raised. The US government will not be shutdown, but there is a risk premium in the markets concerning what will be the cost of raising the ceiling. Clearly, if the ceiling is raised the amount of debt will continue to increase. There is no link between the deficits produced and the ceiling in place.

The real cost is what will be called the debt risk meme that is placed in the heads of investors. First, the US has a large debt problem. Second, the problem is getting bigger. Third, there is no solution. Fourth, there is no part of government that is willing to present a reasonable plan to get to a sustainable equilibrium. The bipartisan debt committee has met and offered some very reasonable first steps. The government and Congress have dismissed many solutions and said the issues will be studied which is code for no action.

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