Debt ceiling negotiations favor theater over action

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As the summer recess approaches on Capitol Hill, the halls of government seem filled with the tales of idiots, full of sound and fury and signifying nothing.

The House Republicans have 'defeated' a bill which was crafted explicitly for that purpose , according to Democratic House Minority Whip Steny Hoyer and Time 's Aaron Sorenson. In a 97-318 vote against the bill, the majority party strove to prove that without massive spending cuts, the debt ceiling will not be raised.

Yet the progressive political website ThinkProgress reported that one of the key architects of the proposed spending cuts, Representative Paul Ryan of Wisconsin, has said  that "you can't not raise the debt ceiling. Default is the unworkable solution, or the alternative, I guess I'd say."

That sentiment is echoed on the right - in the opinion pages of the Wall Street Journal , economist and former vice president of the Federal Reserve Alan Blinder wrote that "Fights over the budget are normal and proper in a democracy, especially when the two parties hold dramatically different views. But threatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea."

Right and left seem to agree that whatever happens, simply continuing on the present course and hitting the debt ceiling at full throttle would be disastrous. Yet political considerations force politicians to consider the unthinkable so as not to appear weak or vulnerable.

There's no way of predicting how stock markets, financial systems or the global credit markets would react to the U.S. failing to raise the debt ceiling by August. Until then, the Treasury Department can juggle figures and use accounting tricks to keep the government ticking, but options are limited after August.

Without serious reform of tax, foreign policy and spending, raising the debt ceiling just keeps the wolves at bay. Charging straight at default, however, is a much worse alternative. Standard and Poor's, the rating agency, has warned that it might downgrade the nation's AAA sovereign debt rating - and political gamesmanship like this week's can't help.

Foreign equities and ETFs could perform better than U.S. assets, but they are just as likely to collapse as investors rush for home. Similarly, it seems rational that a failure to resolve the debt ceiling situation would boost the yields on U.S. Treasury bonds as investors demand a higher premium to compensate for higher risk. However, Treasury notes are perceived as one of the safest investments available, and demand for them might surge - depressing yields - if August arrives without resolution.

the stakes continue to rise, and the outcome remains opaque. Congress should take this issue seriously, rather than using it for political leverage.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Bonds , Credit and Debt , Economy , Taxes , US Markets

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