Sunday, 1 September 2013

Fiscal madness, denial and the markets

This morning the Wall Street Journal ran a piece explaining that the Obama administration and Congressional Republicans are so far apart on the debt ceiling that Republicans see meeting with the White House on the matter an exercise in futility. So nothing is happening to move the sticks on the debt ceiling. Meanwhile, the Treasury Department has stopped the clock on the accumulation of federal debt through some machination no one fully understands, except possibly Jack Lew. As a result, for the past ninety days the official national debt has remained in neutral even as multi-billions have been borrowed by the Federal government. 

There is an interesting section in Dan Brown’s new book, Inferno, about denial — how much of it is simply a human default response to situations the mind cannot process. It cites a study at an Ivy League university which revealed that even highly intelligent internet users would quickly click off a depressing subject and go to something trivial rather than face something disagreeable. It sounds like the federal government — top to bottom — is in denial on the growing national debt and the debt ceiling confrontation coming up in October. Everyone wishes the problem would just go away; but it isn’t going to just go away.

That brings us back to the ever-present market preoccupation with tapering. Can the Fed really consider the shock of an actual start to the tapering process when the rest of Washington can’t get off the dime on how the national debt is going to be controlled? Picture for a moment the sheer madness of the Fed cutting back its purchases of U.S. government debt at a time when Congress is demonstrating its inability to deal with its spending addiction — and at a time when it appears to be ramping up for another costly Mid-East war. Any guesses as to how the bond market might react? Any guesses where private investors might decide to seek refuge? The last time the pols came to this impasse the United States lost its AAA bond rating; the stock market dropped about 15%; and gold went from roughly $1500 per ounce to $1900 per ounce — a record high — in two short months. Here’s what gold’s rise at the time looks like on a chart. . . . . . . . . . . . . . MK

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