Investors’ Guide to the Debt Ceiling Debate
As a professional analyst of public policy issues, the forecasting of political events is a favorite topic. My record has been good.
Despite this, whenever I write on these issues there is a danger. I explain that this is analysis, but there is always a temptation to view the explanation as a politcal opinion. It is not. I can admire political strategy by skillful leaders who represent a different political viewpoint. You should be able to do the same. With this in mind, here is my summary of the current debt ceiling debate.
Congress has a (mostly symbolic) celing on the national debt. Through decisions on appropriations and revenues the Congress participates in setting a budget that has regular deficits. The debt limit is something of a fig leaf, but it does have the force of law.
No responsible official thinks that defaulting on debt is desirable.
- Bernanke stated, "I think using the debt limit as a bargaining chip is quite risky."
- Business leaders join in warning on the economic consequences.
- Speaker Boehner drew sharp questions in his "tough" speech about the deficit problem.
Tea Party Influence
There is a significant effect from the "tea party" voters, and those elected by them. Even the aggressive Republicans cannot do enough to satisfy this group. Here is a Fox News story explaining what is expected:
We're telling Boehner and all of the House Republicans, they came into office with Tea Party help. We now expect them to keep their promises and hold the ceiling on the national debt," said William Temple, head of this fall's Tea Party National Convention. "The Tea Party will not be in a very forgiving mood this fall, nor as the GOP primary season opens, if House freshmen and others elected by the Tea Party cave to Obama. We will find replacements for them this fall.
What it All Means (and how to profit)
The typical pundit commentary on Congress is fun to write and resonates strongly with readers. The theory is that every representative should be like Jimmy Stewart in Mr. Smith Goes to Washington, acting on principle and ignoring political pressure.
The problem is that one person's principle is another one's poison!
The debt limit saga will play out according to the following playbook:
- The debt limit will be raised;
- All participants will play out the string, demonstrating to supporters that they did their best;
- The final resolution will include a commitment to deficit reduction, with some combination of tax increases and spending cuts .
Any scares based upon the debt ceiling issue are buying opportunities for long-term investors. I see the discussion as a predictable political sideshow. It is really business as usual.
[Update: slip on "tax cuts" fixed.]