StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Still No Better Than 50% That Debt Ceiling Is Raised By 10/17...And A Few Other Things

13 Oct 2013
Posted by Stan Collender

Some quick thoughts this morning:

1. It's still no better than 50-50 ("a coin flip" as @thefix said to me on Washington Post TV last week) that the debt ceiling will be raised by October 17, the date Treasury says it will run out of the ability to use "extraordinary measures" and the government will have to operate just from the cash it has on hand every day.

2. If anything the situation has gotten worse rather than better over the past few days with House Republicans in open warfare against their GOP Senate colleagues. It appears that House Republicans need to get something out of the box the are in with the government shutdown and debt ceiling even if it means extracting a pound of political flesh from their own party to do it.

3. Let me say this yet again as directly as possible: John Boehner (R-OH) is the weakest and least effective speaker in my lifetime, and he may come close to taking the all-time title.

4. Has anyone else noted how many times Boehner does the Washington equivalent of taking his ball and going home by starting and then pulling out of negotiations? Has anyone else noted how he repeatedly fails and then says it's up to the Senate?

5. One of the biggest problem with the current shutdown/debt ceiling situation is that no one has any assurance that the person they're negotiating with has any authority to agree to anything. The president can't be sure congressional Democrats will go along with what he might agree to with Republicans, Boehner absolutely knows there is no guarantee that House and Senate Republicans will follow his lead and Senate Minority Leader Mitch McConnell (R-KY) won't be followed blindly by Senate Republicans. In other words, even if there were a deal it not clear who could agree to it.

6. The White House seriously undercut some of its own leverage on the shutdown when it allowed the Defense Department to recall 300,000 civilian workers who were furloughed on October 1. Without that, private sector government contractors would have started furloughing tens of thousands of their own workers by now and the economic pain would be widespread.  This would have seriously increase the political pressure on members of Congress.

The only thing that will get it done

The only thing that will result in the debt ceiling being raised by 10/17 is a significant drop in the stock market that panics Congress into action. I'm thinking a 2-3% drop in broad market indexes each day for two consecutive days is probably the minimum that will cause them to act. Barring that, 10/17 will come and go with no deal. As you may have noticed in the comments section of your last blog post, the GOP pundits have already sold their low information base on the idea that breaching the debt ceiling is no big deal.

How do we get there?


I've been banging this drum for nearly three weeks now: what are the plausible sequence of steps that get us to John Boehner bringing a debt ceiling bill to the floor of the House with the votes to pass it?

House Republicans apparently still believe that a short term CR/debt ceiling raise with joint negotiations on ObamaCare and the long term budget is a reasonable compromise position. This is still a "deal" where Democrats are meant to make policy concessions in return for procedural concessions.

Many House Republicans also, in public, act as though rejecting this "deal" is an unpardonable breach of negotiating in good faith by the President and Senate Dems. The nerve of the Left!

So we still have a situation where any deal possibly acceptable to the WH and Congressional Dems has to be struck with Senate Rs, then we're back to the driver of this entire situation: the civil war in the House between Establishment Rs and Tea Party Rs - only this time without the promise of big goodies to come.

Tell me again, how does Boehner bring that bill to the floor?

My thoughts

1) Changes to the ACA are off the table as part of the debt ceiling hike and the CR. That includes repealing the medical device tax or delaying it for a couple of years. The GOP needs to understand that the Dems are no more likely to agree to this than the GOP is to agree to tax hikes as part of the deal, and just drop it. They lost this one, time to pick up and move on.
2) Broad entitlement reform and tax reform like Paul Ryan has talked about, regardless of their merits, are not going to happen in the next week. This is something that would take months to reach consensus on, if it's even possible at all. It shouldn't be part of these talks.
3) Duration - 6 weeks is too short and a year is too long, the only viable duration is something that takes us past the holiday season but not too far past, say mid January. The GOP won't let the debt hike go past that and the Dems don't want to lock in the lower spending levels in the CR for longer than that.
4) Realistically, there aren't many things you can attach to the clean bills that won't kill it. An agreement to look at replacing some of the sequester cuts with equivalent but more targeted cuts. A timeline for budget negotiations to proceed after these bills are passed. Maybe another useless committee to study the issue. That's about it. Hopefully this is enough of a "fig leaf" for the GOP.

How do we get there? I have no idea. I can see something like the above barely squeaking through the Senate with a handful of Republicans breaking ranks and not filibustering but not actually voting in favor of it. I don't see it making it through the House. As I said in my first post, it will take successive market meltdowns on Monday and Tuesday to make that happen.

The most aggressive Democratic response ...

... would be to take the debt ceiling off the table for the medium term using Premium Treasury Notes, and then hold the line on the GOP Shutdown until the House caucus cracks under the pressure and they can discharge a clean CR.

While I wait to go back to work

Only quibble I have is with Boehner and the ball comment. I've always felt it was more like the "take your ball and go home" since he doesn't seem to bring anything with him to play.

too optimistic

I think a 50% chance of resolution by 10/17 is wildly optimistic. I think that there is a good chance that there will be a vote on something that the Rs propose on 10/17, but that it will fail - either in the House or the Senate. A debt ceiling extension will pass only after at least one payment of something has been delayed. The equity markets will freak, but the bond markets will hang in for an extra day or two. At this time the best attempted projections are that this will happen on the 21st. So I think the extension comes on the 22nd or 23rd. It will not be accompanied by a CR.

When/If the Markets Crack

. . . they will not politely, delicately, efficiently and reversibly dip to the minimum extent required to prompt sensible political action with the respect to a CR and the debt limit. Both the debt and equity markets will careen off on their own confusing internal dynamics, each of which will feed on itself and develop on its own time table. This will be fairly confusing (e.g., short term debt markets (excluding the tranche of virtually current maturities) are liable to be fed enormous inflows seeking 'risk off' trades, and so not react with vehemence, leading those who publicly chatter to delude themselves and underestimate the seriousness of the situation). At the same time, the equity markets will begin to react to the recessionary impact of intermediate term fiscal policy benchmarked off the sequester and there will be some kind of reappraisal of political risk in the United States across the board, here and abroad.

While it's possible to sound measured in one's assessment of the situation, to create delightful little default matrices/decision trees with quantified probabilities assigned, etc., the ugly fact is that we're dealing with a mystery, not a puzzle. One thing is for sure--our political class and our financial elite do not understand one another, nor does either understand the dynamic of the system in which the other operates. And that's a recipe for disaster, despite the best efforts of technocrats at the Fed and on various staffs, executive and legislature, public and private. Oh well, the financial elite and the Republican Party delivered the Great Recession five years ago. Perhaps its the turn of the political class and the Tea Party to deliver the Mother of All Recessions.

They have just about run out the clock on the debt ceiling

All news sources I have seen today suggest that there will be no bill for Reid to present today, which means that the earliest this could happen is Monday, October 14. We know he will not get unanimous consent to proceed, so he will need to schedule a cloture vote for Tuesday, October 15, say at 9 AM. I will take it for granted that there will be 60 votes for the bill at this time, given that the markets are not likely to react well to nothing have transpired since last Friday, when they were sure a deal was around the corner. (See below.) Thirty hours of debate will be had, hopefully 15 hours on Tuesday and 15 hours on Wednesday, sending a bill to the house by the crack of dawn on Thursday, October 17. The house will need to draft, debate, and vote upon the rule to bring up the bill (and, again, I am assuming that Boehner does bring it up), and debate and vote on the bill itself. They could potentially get this done in the wee hours of October 18.

I think the schedule moving faster than this are now looking relatively poor (say 25%), and the chances they move even more slowly could be as high as 50%. And one cannot rule out people trying to stretch this thing out until Monday morning, October 21.

Now, back to the market: there was about a 3% gain from the lowest point on Wednesday to the market close on Friday for the S&P 500. There is no real reason, absent sudden really good news, for the markets not to drop at least that much near the open on Monday. If there is no bill by tomorrow noon, the rout will be on.

Which brings us to the T-bill front. There are now MMFs that are advertising the fact that they have purged their portfolios of any T-bills due between now and early November. Some that have not will probably start scrambling for the exits ASAP, turning what is usually a very thinly traded market (T-bills are to hold) into something I am not sure we can easily foresee. That said, I expect lots of people to pile into longer maturity treasuries (and lots of people will be befuddled by this), and price swings there could be pretty interesting as well. The real issue with this kind of volatility being that I don't know whether we can rule out something at least semi-important from blowing up, even before any possible default event occurs. My expectations are that we somehow skate by this, but find out later that some fund/bank/investor took a real bath.

And, I would love to be wrong about this and find myself back at work on Tuesday. But, as they say, hope is not a plan. And I see no plan.

Well...maybe we are about to have sudden good news

Evidently McConnell and Reid are really close to an agreement. Time-wise, I don't think they can make October 17, but October 18 might be possible. One big question is whether the Senate will give unanimous consent to take up the bill that is agreed upon with limited debate. If they can (I would be surprised), then a bill could be introduced on Tuesday, October 15 and likely voted on the following day after limited debate; that sends the bill to the house on October 16 and it is just possible they could ram it through by the morning of October 17.

If they cannot get unanimous consent, then we're left with introducing the bill tomorrow, doing the cloture vote on on Wednesday October 16, finishing debate and voting on October 18 and forcing the House to act with alacrity to get something in place by October 21, when we are told there is a really likelihood of Treasury not being able to make payments.

Can anybody think of a way this could get done by October 17?

And, of course, all bets are off if the House does anything but rubber-stamp the Senate version. I note that combining the reopening and the debt ceiling bills into one means a single "violation" of the Hastert rule is all that is needed.

Nope; now it is long odds a bill will be passed by October 17.

Senate negotiations have "paused" so that the House can try to put something together. I think it's a screen bet this makes overall passage "by" October 17 all but impossible.


One issue that seems to be overlooked is that when we go into default there will not a cataclysmic event initially. This will allow the right wingers to say, "I told you so". The damage will occur over an extended period of time, therefor, Obama, the Treasury, and the business leaders (whoever they are at this point) have to engineer a scenario to wake these people up. Present predictions are not reaching them.

A World Historical Moment

In my opinion the chances are much higher than 50/50 that we're going to breach the debt ceiling. The Tea Party's madness has driven us to a moment of World Historical proportions.

By energizing the Tea Party - culturally alienated Republicans, mostly Southern, mostly older, who now think they're in charge -- the Republican Party is rapidly approaching its own demise.

We're going to breach the debt ceiling because the Tea Party and Democrats disagree about what is at stake here. Interestingly, what each side thinks is at stake has nothing to do with the debt ceiling.

For the Tea Party, the most important objective is expressing their inchoate rage against American society -- a society in which a black man can become president, in which whites will soon be less than half the population, in which the longstanding Republican hold on executive power has been shattered.

For Democrats, the most important objective is defending the Constitution against the most vicious attack since the Civil War. Elections matter. Legislation is enacted when both houses of Congress and the president agree, not when one anarchistic faction threatens to blow up the world if it doesn't get its way.

I'm a Democrat and I agree with the Democratic position. The debt ceiling is very, very important. Breaching the debt ceiling will be catastrophic. There will be an immediate body blow to the economy and an immediate decline in U.S. influence around the world. I'm very angry that the Tea Party (and spineless GOP leaders) would allow this to happen. But some things are even more important to me, namely constitutional government.

The GOP is about to destroy itself for at least a generation. Elderly people are going to be very upset when their Social Security checks don't arrive. Plutocrats are going to be very upset at the losses to their portfolios. Red States -- who are takers rather than givers under our federal system -- are going to learn a bitter lesson about the importance of federal programs.

As we crawl out of the wreckage, the Tea Party will be a dirty word, and Ted Cruz won't be able to win a race for dogcatcher.

Social Security Trust Fund

A couple of questions just occurred to me:

1. AFAIK Social Security is legally paid out of the trust fund, not out of the general fund.

2. The trust fund is almost entirely invested in treasury notes of various maturities.

Please correct me if I'm wrong about this, but doesn't this introduce a serious problem if the treasury starts defaulting next week? Could SS become insolvent if the liquidity of treasury securities suddenly freezes?

ANSWERS 1. Social Security is

1. Social Security is legally paid out of the general fund.

2. A Different Matter: The Myth About Taxes to Pay down “Debt”

"We often hear public statements about how “irresponsible” it is for us to incur deficits in the present, issuing Treasuries that will become “great burdens to future generations of Americans.” This concern was voiced repeatedly in the great debate of 2011 regarding the “debt limit.” That legislative limit is actually computed using not only the amount of Treasuries held by the public, but also what are really just accounting entries for Social Security and other government “trust funds.” These “funds,” totaling about $4.5 trillion, do not really hold any money— there has never been any cash in them. They are totally accounting entries, made according to formulas, inside the books of the federal government. Although publications by the Congressional Budget Office make it clear that they understand the distinction, the historical tradition of computing the limit using “gross federal debt” for this legislative purpose prevails. The much more relevant questions relate to the real Treasury securities outstanding, sometimes referred to as “debt held by the public.”

"How could repayment of these Treasuries become a tax burden? Only if we believe that the total of Treasuries outstanding needs to be paid down some day: that the total $9.7 trillion of Treasuries held by the public has to be reduced to zero, or to some small figure, through increased taxes over time. But the U.S. has had Treasury securities outstanding every year since 1791, and has never paid down the total outstanding.2"

Newman, Frank N. (2011-11-21). Six Myths that Hold Back America: And What America Can Learn from the Growth of China's Economy (Kindle Locations 927-938). Diversion Books. Kindle Edition. FORMER DEPUTY SECRETARY OF US TREASURY

SS fund

IIRC the government has one account at the Fed and all payments come out of there - both SS and the rest. The *internal* accounting is separate, but if there are no funds in the account there are no funds for anything.

SS is likely to stay solvent (current assets > current liabilities), but could suffer a liquidity event (cash < payments due). Most of SS treasuries are non-marketable so market liquidity is never an issue. But if Treasury has cashflow problems then SS will have cashflow worries.

The "solvency" of the SS

The "solvency" of the SS trust fund is irrelevant if the Treasury is unable make good on the bonds that it holds because it has no cash. It doesn't matter how much money you have in your bank account when your bank goes bust. And there is no FDIC insurance for the US Treasury.

Jim - The "solvency" of the SS

What do you mean the US Treasury has no cash? It issues it, it creates it. Treasury is the only entity on planet earth that can issue US dollars. The problem is that a default would say that it's not legally allowed to. the Treasury/Fed doesn't use cash to pay SS recipients. It uses keystrokes. The debt ceiling is an artifact of a former currency and has no business being around in the modern world. It was designed to protect the gold supply.

As for FDIC. People buy treasuries because they are the safest asset on earth. It's where you stash your dough if you have more than $250,000 in the bank because the FDIC can't insure it.


As people dump short term Treasury notes for longer term, Vultures, who assume they will eventually be paid but do not need to be paid in the next year will start buying them up when the price is above the same as the 1 year. If the debt ceiling is fixed soon, they can sell them back at a tidy profit. If the debt ceiling continues, they get a better deal than buying 1 years.

One way out is a Congressional PANIC that forces a discharge petition in the House that is rubber stamped by the Senate. This gives Boehner plausible deniability, moderate GOPs can solicit donations from Big Corporations to fight their primary challenges. Remember that the GOP voted against the BigF bailout in 2008. Democrats voted 140–95 in favor of TARP, while Republicans voted 133–65 against. Many of those 65 retired or were primary defeated by TParty.

TParty are Libertarians who believe that Government actions and spending hurt the economy. They are willing to not fund the government and not raise the debt ceiling because they believe it will help the economy in the long run.

I think that it is probable

I think that it is probable that rather than default, we go through a series of very short measures, possibly suspending the ceiling for a week or less.

I think it's more probable

...that October 17th comes and goes with no agreement. Then on the morning of the 18th the GOP declares "see it wasn't as bad as they said it would be". The problem is that things won't start to get bad until October 22-24 and won't become catastrophic until October 31 - November 1. Unfortunately, emboldened by the fact that the world didn't end on the 17th, we may end up going off the real cliff 1-2 weeks later.

Making money off the Default

Is it possible that GOP members of Congress are shorting US Treasuries, knowing they will make a lot of money in a default situation?

I have been curious about why

I have been curious about why Obama recalled those Defense Department civilians, since it does indeed undercut his goal to obtain a clean CR and relies on a cloudy interpretation (almost a "stretch") of the law. It's hard to believe that the motivation is short-term good governance, overriding politics and larger objectives.

I don't get it either.

I don't get it either.

Why Recall DoD Civilians?

Probably because a lot of them do things like staff the PXs -- and without them, the military families find that they have nowhere to buy groceries.

In short, a lot of stuff in the military that you would assume is done by soldiers, is actually done by civilian contractors. And with the shutdown, it is either not getting done or is is only getting done by people who have to work but aren't getting paid. (Just like a lot of government employees.) It's not a situation which is bearable for more than a couple of weeks.

In spite of which, I look for the debt ceiling to get raised (on a crash basis and probably not for very long), but the shutdown to continue for a couple of months. It will take that long for the non-Tea Party folks to figure out that the damage from the shutdown is worse than the damage they will take from the Tea Party nihlists when they vote to get things up and running again.

If Treasury lacks cash to pay

If Treasury lacks cash to pay all bills, then there is no assurance that troops in Afghanistan will be paid, just as there is no assurance that bondholders will be paid first or that SS will get covered first. No basis for categorizing payments and no computer program to do the order in which the checks get written (payment get transferred). So when cash runs out, the stuff will hit the fan and it isn't possible to control where it will go. Wouldn't that be the point at which things go completely ballistic?

WTF just happened today?

I was working at a client all day, got back to the hotel, and am trying to parse exactly what went down in the House today. It's making my head hurt, because it is all so illogical.

As I said in my first post, it's going to take a market meltdown to motivate action. It looks like that meltdown will come tomorrow unless a deal is announced before the bell.

Boehner needs to step down as speaker. He is an utter failure as a leader.

Sanity prevails

The Tea Party may have done enough damage to itself to make moderates less afraid of a primary challenge. At least it puts the issue of shutdown before the voters.

McConnell is smart enough to know that TeaParty can win primaries, yet lose general elections to credible opponents. Default might make McConnell toxic in 2014. The incentives were in favor of the Senate making a deal, Boehner got the cover he needed so default avoided.

It would be a good idea to end the debt ceiling, but this Congress will not do it.

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