The intersection of finance and politics can often spark intrigue. Recently, billionaire investor Warren Buffett addressed students at Georgetown University, suggesting it would be “pretty damn dumb” if Congress and President Obama failed to agree on raising the national debt ceiling. At Economic Prism, we share a particular delight in the bluntness of words like “damn” and “dumb” when describing the nation’s leaders.
However, contrary to Buffett’s view, we believe that not raising the debt ceiling could actually be a smart move. We see the value in Washington’s gridlock preventing the Treasury from borrowing against future earnings to cover past expenditures. Additionally, we welcome any chance to dismantle parts, or even all, of the massive Obamacare structure.
We also hope that financial markets show some nervousness during this debt ceiling showdown between the House and the President. With the S&P 500 hovering around 1,700, it seems unjustifiably high, though we do not advocate shorting it. As John Maynard Keynes wisely stated, “Markets can remain irrational longer than you can remain solvent.”
Ideally, the debt ceiling debate will temper some of the speculative fervor in the stock market. This moment presents an excellent opportunity to refine your list of stocks you want to own—and set your target prices. Equally crucial is preparing your mindset to take action when others are fleeing.
Below, we provide a perspective on the ongoing debt ceiling negotiations and the potential for a government shutdown…
In Favor of Government Shutdown
“How Congress and President Barack Obama handle the debt ceiling may influence market stability for the rest of the year,” reports MarketWatch.
“With the anticipated tapering of $85 billion a month in asset purchases fading at the September Federal Reserve meeting, investor focus has shifted to the impending clash over the budget and the debt ceiling.
“The House has already issued a challenge to the Obama Administration by passing a budget bill that extends government operations through mid-December while cutting funding for Obama’s health-care initiative. A government shutdown could materialize if a budget is not agreed upon by October 1, the start of the 2014 fiscal year.”
Are you worried about the prospect of a government shutdown? If so, take a moment to breathe deeply before assessing its implications.
Truth be told, advocates for smaller government, personal freedom, independence, and liberty should view a government shutdown favorably. The outcome would curtail the government’s capacity to interfere in the economy and might eliminate the use of taxpayer funds to subsidize everything from pancakes in Washington to mango farmers in Pakistan. Moreover, it could finally halt government benefits checks for deceased employees.
But that’s not all…
Shattering the Debt Ceiling
A government shutdown would force the government to halt the use of credit for expenses it cannot afford. At least, that is the theory.
The truth is that a government shutdown should have occurred months ago when the Treasury exhausted its legally permitted debt limit. Regrettably, the Treasury has substituted accurate accounting with creative bookkeeping to balance its financial statements.
Believe it or not, Treasury Secretary Jack Lew has kept the U.S. government’s debt level at $16,699,396,000,000 since May 17—over four months now—which hovers just below the current borrowing cap. As of last Friday, the reported debt was still locked.
Moreover, the Treasury has continued to incur monthly deficits without increasing its debt. In July, it recorded a deficit of $98 billion. In August, this deficit grew to $148 billion.
Where is all this monthly deficit going? Shouldn’t it be reflected in the overall debt totals?
No matter how the Treasury frames its reports, the debt ceiling was effectively broken in mid-May, if not sooner. Keep this in mind as the spectacle from Washington unfolds in the weeks ahead. What you’re witnessing is likely to be a performance of bluster and deception.
Sincerely,
MN Gordon
for Economic Prism
