As the dreaded government shutdown continues and America somehow manages to make it without the assistance of non-essential federal employees, a crisis to end all crises is looming.
In just under two weeks, the U.S. Treasury will supposedly run out of cash to pay its bills.
When that happens, as the mainstream media describes it, the Obama administration may begin defaulting on the federal government’s $17 trillion of debt. Of course, this economy that the President cannot fix forces many Americans to choose which bills to pay and which bills to delay. But our government allegedly lacks the capability to prioritize its payments.
After meeting with Wall Street executives to discuss the impending debt ceiling crisis last week, President Obama appeared on CNBC. He said that not lifting the debt ceiling would lead to catastrophic results. The White House appears determined to drum up fear to achieve their goal of increasing the limit without concessions. Inciting panic in the financial sector only benefits the White House in their apparent pursuit of general hysteria.
It seems, however, that the financial sector chose not to play along. Then again, Wall Street is not like Hollywood. Investors have skin in the game, along with the skin of their collective clientele. Going along with the president’s agenda may not be profitable, even though it would serve his political interests.
For evidence, observe the performance of federally-issued securities called treasuries. The federal government borrows by issuing these treasuries (essentially IOUs), which carry different borrowing terms and rates. These securities can then be traded back and forth, with the trading constituting a major financial market. As the price in the market for a security goes up, its yield goes down. One would think that if there was a strong belief that the U.S. was truly going to default, all of the securities already in the market should have prices hitting the floor, with sky-high yields.
Alas, that is not the case.
According to the Wall Street Journal, the yield on the ten-year Treasury note, which is a benchmark for economists, fell to a seven-week low as of October 2. In other words, prices on the 10-year note rose. That does not imply that savvy investors are flying away in fear of a default on U.S. securities.
Additionally, the Journal also recently reported how little Wall Street seems to be rattled by any possible doomsday cash-out date. The U.S. Treasuries market, as well as the stock market, seems to be showing few signs of concern over the impending debt limit deadline. And then Moody’s CEO Raymond McDaniel said in his own CNBC interview: “It is extremely unlikely that the Treasury is not going to continue to pay on those securities,” ruling out fears of default.