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The probability that Congress and the Administration fail to raise the debt ceiling before the Treasury runs out of cash has risen substantially… [Frankly,] it seems the height of policy folly for elected officials, intent on a game of budgetary chicken, to chance this downside risk during an economic recovery that was sub-par to begin with and lately seems to have faltered further. [It is important to remember that] sometimes in a game of chicken, people get injured—seriously. [Let us explain.] Words: 608
So says an article* at macroadvisers.blogspot.com which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. The article goes on to say:
Our initial estimates are that if such action is delayed one month while a modest deficit-reduction plan is negotiated, Treasury debt will be downgraded, interest rates will rise modestly, and the economy will enter a brief growth recession.
- Relative to the baseline, GDP growth would be slowed by 0.6 percentage point during the second half of 2011, but boosted by 0.2 percentage point during 2012.The unemployment rate would rise to 9.6% by the end of the year compared to 9.2% in the baseline, and still exceed 8% by the end of next year.
- During the third quarter, long-dated Treasury yields would rise by 20 basis points relative to the baseline and by 10 basis points thereafter.
- Private credit spreads for long-dated yields would widen by 20 basis points in the third quarter, but then quickly return to the baseline value.
- Stock prices would temporarily decline roughly 5%.
That these effects are relatively benign depends critically on the assumption that the political impasse over the debt ceiling is resolved fairly promptly and with at least some progress towards long-run deficit reduction. [However,]
- The economy would deteriorate quickly and much more dramatically if expectations were for a long impasse with an uncertain outcome.
- Of course, even worse — although very unlikely — would be an outright sovereign default, a scenario that is practically impossible to size.
More benign scenarios also are possible.
- The debt ceiling could be raised before the Treasury runs out of cash but Treasury debt downgraded nevertheless. We believe this would have minimal effects on financial markets or the economy.
- Another possibility, and one that looks increasingly likely, is a deal under which the President can raise the debt ceiling up to three times before the next Presidential election in exchange for progress on deficit reduction. This, too, we believe would be less pernicious than the scenario developed here.
Conclusion
It seems the height of policy folly for elected officials, intent on a game of budgetary chicken, to chance this downside risk during an economic recovery that was sub-par to begin with and lately seems to have faltered further.
Sometimes in a game of chicken, people get injured—seriously.
*http://macroadvisers.blogspot.com/2011/07/debt-ceiling-delay-equals-growth.html
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Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above