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The U.S. Congress has a little less than two
months to raise the $14.3
trillion debt ceiling or possibly default on its debt. Treasury Secretary Timothy Geithner says not allowing the Treasury to raise the debt limit would
be "catastrophic"
for the economy.
Geithner is crying wolf according
to Chris Whalen, a banking
industry analyst and co-founder of Institutional Risk Analytics. Whalen argues Congress should vote against raising the debt ceiling unless they agree to major spending cuts. "Congress has the right to say
'no' and the people of the United States have a right to say
'no' we don't want to issue more debt," he tells Aaron Task in the accompanying clip.
Whalen first made his thoughts known about the debt ceiling in a Reuters
opinion piece Why Congress should
vote no on raising the debt
ceiling published
in April.
"My view is that Congress
should vote down any debt ceiling measure unless President Obama agrees to sign the balanced budget amendment. Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland
and Ireland today, it will be a good thing for America's political debate to default
— at least for a few weeks.
Then people will know that the once unthinkable is very possible."
At the time, Whalen's comments were viewed as radical, and some say still are. However, in recent weeks, he seems
to be gaining more
support from some of Wall
Street's heavy hitters. For example, in a recent interview with the Wall
Street Journal hedge fund
billionaire Stanley Druckenmiller
echoed some of Whalen's rhetoric.
No one knows what will happen if the Congress does not raise the debt limit or if there's even a good chance of it
happening, but Whalen is
holding out hope: "If we
don't have consequences
in politics then we end up with what we've seen
in the last 30 years, which
is a permanent political
class."
What If the U.S. Treasury
Defaults?
The WSJ article referenced above
is What If the U.S. Treasury
Defaults?
One of the world's most successful money managers, the lanky,
sandy-haired Mr. Druckenmiller
is so concerned
about the government's ability
to pay for its future
obligations that he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury
bonds—if the result is
a Washington deal to restrain runaway
entitlement costs.
"I think technical
default would be
horrible," he says from the 24th floor of his midtown Manhattan office,
"but I don't think it's going to be the end of the world. It's
not going to be catastrophic. What's going to be catastrophic
is if we don't solve the real problem," meaning Washington's spending
addiction.
Widely credited with orchestrating Mr. Soros's successful shorting of the British pound in
1992, Mr. Druckenmiller also
built his own fund, Duquesne Capital, into a $12 billion titan. He announced
plans last year to close the fund
and now reports, "I have no clients." He is still managing
his own money, which Forbes magazine recently estimated at $2.5 billion.
Whatever the correct figure is,
it would be significantly larger if Mr. Druckenmiller hadn't given away so much
of his wealth. The online
magazine Slate reported last year
that Mr. Druckenmiller
and his wife gave away more money in
2009—over $700 million—than anyone else in the country.
Over the last two decades,
he has been the largest benefactor of the Harlem Children's
Zone, a community service organization
featured in the movie,
"Waiting for 'Superman.'"
In a May 2 letter to House
Speaker John Boehner, Mr. Geithner
warned of "a catastrophic
economic impact" and said,
"Default would cause a financial
crisis potentially more severe than the crisis from which
we are only now starting to recover."
In a Monday speech at the
New York Economic Club, Mr. Boehner
fired back, saying that "It's true that allowing
America to default would be irresponsible. But it would be
more irresponsible to raise
the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process."
So the moment couldn't be
better to consult Mr. Druckenmiller, who almost never gives interviews but is willing to speak up now because he
thinks that fears about using the debt-limit as a bargaining chip
for spending cuts are overblown—and misunderstand
the bond market. "The Treasury
borrowing committee letter speaks about catastrophic financial crises, comparing it to Fannie and
Freddie. That's not what we're talking about here," he says.
He contemplates the possibilities
for bond investors if a drawn-out
negotiation in Washington creates
a short-term problem in servicing the debt but ultimately reduces spending:
"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece
of paper. I get an income stream obviously over 10 years . . .
and one of my interest payments is going
to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind
that it's not going to pay, but it's going to be delayed. But in exchange for
that, let's suppose I
know I'm going to get massive cuts in entitlements and the government
is going to get their house in order so my
payments seven, eight, nine, 10 years out are much more assured," he says.
The
Upside and Downside
To suggest there is "No Downside" is a bit inaccurate. A better way of phrasing the setup is there is "no NET downside" to not increasing
the ceiling without significant budget cuts.
The downside is a temporary default. Interest
rates may go up if that happens. Some parties maybe harmed in the process. Thus, the downside is a temporary delay in payments and the small mess that might entail.
The upside is a potential permanent reduction
in US spending. From my perspective, that is a massive upside
potential, for a bit of short-term
downside.
Risk of Greek-Style
"Solution"
It should be crystal clear that Congress and the
administration need to do something
about budget deficits before
the market imposes a "Greek-Style"
solution on the US.
I mentioned that possibility in my recent Yahoo Finance video appearance: Debt Ceiling Discussion on Daily Ticker with Mish,
Aaron Task, Henry Blodget:
Will the Bond Market Eventually
Force Congressional Hands?
How You Can Help
Please pick up the phone,
call your Congressional representatives, and insist on
"Major" budget reductions now "Not in the Future", before
agreeing to hike the debt ceiling.
Here is the Online Directory for the 112th Congress
It is time Congress call Geithner's and the President's
bluff.
The way to make that happen is
to insist your representatives recognize something must be done NOW, not 10-years from now about the budget crisis.
Mish
GlobalEconomicAnalysis.blogspot.com
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