Why the financial markets might shrug off another debt-ceiling spat - Macleans.ca
 

Why the financial markets might shrug off another debt-ceiling spat

New Washington drama might find a distracted audience


 

AP/J. David Ake

A similar version of this article appeared first on Canadian Business.

Four years into the recovery, the U.S. economy has finally gained some momentum—and just in time to give Canada a nudge forward when all domestic engines of growth, from consumer demand to the housing market, have burned out. What America needs now is a decent stretch of road without major potholes. “We need a period of protracted calm,” David Carroll, head of Wealth, Brokerage and Retirement at Wells Fargo told Reuters in a recent interview, “and since 2009 we’ve had no less than a succession of quarterly the-world-is-coming-to-an-end events.” There were, among others, the debt ceiling standoff-cum-rating downgrade of 2011 and the fiscal cliff scare of late 2012, followed by awfully-timed tax hikes and spending cuts earlier this year.

Unfortunately, there are ample chances we’ll see another replay of that tired script this fall. The end of the fiscal year on September 30 is the deadline for Congress to revoke or replace the second tranche of sequester cuts, set to kick in on October 1st and mandating another $17 billion worth of across-the-board spending reductions. And in October or November, according to the latest estimates by the Congressional Budget Office (CBO), the government will once again hit its self-imposed debt ceiling, a legislated limit on how much the country can borrow.

But will financial markets care? Perhaps not.

Earlier this week rating agency Standard and Poor’s changed its U.S. long-term debt outlook to “stable” from “negative,” despite the concrete prospect of more showdowns on fiscal policy. The move reflected confidence in the Federal Reserve, the U.S. dollar and private sector growth. The agency, analysts explain, has already factored in dysfunctional federal politics in its AA+ rating, which it cut from AAA in August 2011.

The upgrade failed to cause much stir in the markets, leading many commentators to proclaim that S&P has lost influence with investors. While that might be true, there’s another possible explanation: The markets too might have already priced in the hopelessness of Congress. If that’s so, then the fall theatrics might also elicit minimal reactions on the stock market, which would drastically reduce their potential to damage the economy.

That would be welcome news because current conditions in Washington aren’t exactly conducive to bipartisan cooperation. The CBO has revised down its deficit and debt projections considerably from its February forecast. It now expects the deficit for this year to be $203 billion smaller than the $845 billion it previously projected and debt to come in at 74 per cent of GDP ten years from now rather than 77 per cent. This, the Washington punditry unanimously agrees, has considerably reduced the pressure for Congress and the White House to reach a grand bargain on the budget and long-term debt management.

The various scandals embroiling the White House, from the IRS probes to the Internet and phone snooping programs, have Republicans in a blood-thirsty mood and eager to push the knife deeper into the Obama Administration’s side. Many Democrats, on the other hand, have quickly seized on the CBO revisions to retreat back to the old trenches and the comfortable belief that “there is no need to touch Social Security.” A couple of unimaginative types are also re-hashing the old act-or-lose-your pay gimmick through draft legislation that would place salaries of members of Congress in an escrow account if they fail to increase the government’s borrowing authority. We’ve seen that before: The bill that averted a debt-ceiling crisis earlier this year—by temporarily suspending the borrowing limit—would have frozen Congressional pay if the House or Senate had failed to pass a budget by April 15 (lawmakers would have received their salaries anyway at the end of the current legislature).

Hopefully consumers and businesses, whose confidence plunged every time levels of drama in Washington reached new peaks, will be more resilient too. After years of watching the same show, they might be able to, as the say, keep calm and carry on.


 

Why the financial markets might shrug off another debt-ceiling spat

  1. ‘After years of watching the same show, they might be able to, as the say, keep calm and carry on.’

    Yeah, everybody has finally realized it’s all just politics. Reality is quite different than that.