We recently saw reports that a number of Congressmen reeked of alcohol as they exited the chambers the night the Government shut down. Apparently the only thing worse than the pressure of public office is these days is having to face it sober.
We have been here before, you can read our commentary from the days when the minority in Congress realized they could hamstring the majority because the country lacked fiscal disciplineback in 2011, and all of this innocent bickering began:
This time, as both sides appear to be playing a dangerous game of chicken, and both the Chinese and Japanese governments large holders of US Treasury obligations, are pressuring Washington for some sort of assurance that it will not default for the first time in modern history.
US Financial Executives are also beginning to worry. In a recent survey on the perceived effects of a hypothetical debt ceiling breach, the Association for Financial Professionals summarized the survey responses as follows:
“A default would make U.S. Treasury securities, an investment vehicle used in many companies’ short-term investment portfolios, far less attractive. The survey found that one-sixth of U.S. organizations currently holding U.S. Treasury securities would shift out most or all of those investments if the debt ceiling isn’t raised in time. Another 36 percent of organizations would hold onto their current holdings of Treasuries, but would not purchase these securities going forward.
Meanwhile, half of the respondents say that a government default would harm their organization’s access to, and raise their cost of, capital. An increase in the cost of bank credit and higher cost of debt financing were each cited as possible outcomes by 27 percent of financial professionals.”
In other words, a default would cause a nearly instantaneous shift in short-term investment preferences away from US Treasuries. While this in and of itself would not be a concern under current monetary policy, even the Federal Reserve would be hard pressed to come up with a program for purchasing Government securities that have not yet come into existence.