Tuesday, May 3, 2011

The Glass Debt Ceiling

The end game on the debt ceiling has been set into motion. The debt ceiling has been utilized as a political football. On one side is the GOP, which is vowing austerity measures at the federal level as a condition to raise the debt ceiling. On the other side is President Obama and the Democratic Party, which wants spending cuts implemented, but also wants to keep the safety nets intact.

The debt ceiling is at $14.3 trillion. As of yesterday, the debt stood at $14.25 trillion. At the current trajectory, the debt ceiling will be reached sometime in June 2011.

Even now, the Treasury has set into motion a series of bookkeeping maneuvers to keep the government running for as long as possible. There is more information on the development here. These measures buy time, but only slow down the rise of the debt. An increase on the debt ceiling will still have to be voted on in Congress and then signed into law.

There is a lot of bear market politics in play as the GOP continues to accelerate farther to the right, widening the gap between the GOP and the Democratic Party, and making the political arena more polarized.

Expect a lot of drama in the political arena for a number of weeks, perhaps as long as a couple of months, as the debt ceiling gets utilized as a political football. There is already talk of "economic doomsday" in politics and media about the consequences of not raising the debt ceiling. Just over a week ago, Standard and Poor's downgraded its credit outlook for the United States, citing political gridlock. There is more information about the development here.

In the end, cooler heads are going to prevail, but the political theater that takes place between now and then is going to make many people nervous. This nervousness is already evident with banks lobbying to push for an increase in the debt ceiling. We are in the final stages of a Primary degree bear market rally, which results in the type of social mood where there is a reluctant willingness to compromise.

On the much longer term, the United States will eventually default on its debt (around the year 2013 - 2015), but it won't be due to a failure to raise the debt ceiling, but due to rising interest payments eventually making the existing debt too heavy of a burden to bear as tax revenue dries up.

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