News you can lose

With a bit of luck this will be the last time that we will have to be looking at the US government shut-down and the debt ceiling debate as polarisation melts away and formerly intractable positions are suddenly found to have some flex left. Well, maybe it’ll be no more than the last time until next time.

Just nine hours before I arrived in my office this morning, Alex Moffatt of Joseph Palmer & Sons in Melbourne wrote in his Obiter Dictum footnote: “Inaction on Capitol Hill…………………”

By the time I was on my way, the news was full of them being nearly there. All the while, this made most of the “Special Reports” which the media had painstakingly prepared on Armageddon and beyond sound like turns from the Comedy Store.

Editors must have been struggling to share the news that enough moderate Republicans have let it be known that they would come forward to back a compromise agreement and to vote with the Democrats in order to assure an acceptable outcome when they were also sitting on clips of talking heads telling us that the world is teetering on the brink of disaster.

A hiccup in the sequence of payments might cause a hiatus in consumption but I cannot imagine that any loss now would be made up as soon as back-payments are completed.

Some of the nonsense which has been spouted by parts of the media really does make me wonder how the average citizen is ever supposed to form a considered opinion on the state of the world.

Trying to draw comparisons between the events following the collapse of that good old pirate ship, Lehman Brothers, and the aftermath of a potential technical default by the US government on some of its imminently maturing bills beggars belief.

For example, take the following: the wonderful BBC, not exactly known for its high standards of financial reporting, broadcast a piece about how a failure to pay social security cheques would cause a significant down-turn in the US economy. It interviewed an elderly lady who explained how she had paid into the system for forty years and how she depended on social security for survival. I take her point.

Just hiccups

However, has anybody ever said that if the government were to find itself obliged to suspend payments of social security so as to preserve cash in order to meet debt redemptions, that those payments would never be made? Barely. Postponed and delayed maybe but cancelled? Do me a favour! A hiccup in the sequence of payments might cause a hiatus in consumption but I cannot imagine that any loss now would not be made up as soon as back-payments are completed.

I could go on. Yesterday evening some character was on the wireless telling us all how a default in US bonds would bring down the global banking system and how, following the post 2008 bailouts, there was no more firepower in the system. Although I agree with him on the latter point which is one which I believe might be taxing us again in the future, the former is pretty ill-informed. The US Treasury does not offer a cross-default clause on its debt. In other words, if it fails to pay a bill or a bond on redemption, this does not affect any of its other outstanding issues. One failure to pay does not put all $16 trillion into default. That explains why it is only the treasury bills which fall due in the immediate future have higher yields without the rest of the curve being affected.

Apart from that, I would not regard the 0.2% discount rate on the $12bn T-Bill which matures on Thursday as being a level exactly suggesting a risk of the capital never being repaid.

Debt markets, the ones, if any, which understand the workings of governments, have been fairly grown up in their handling of the situation. Equity markets, normally less versed in macroeconomics and largely ignorant of government finance, have also behaved reasonably well. The big losers in the game have been the media. It was seriously reported this morning – guess by whom – that markets had “surged” following the news that the politicians in Washington were moving closer. “Surged”? Fair enough; the Dow had yesterday traded down 100 points on the open, had rallied all day and closed up 64 points but I would not class that as a “surge”. Nor would I class the Nikkei closing up ¼%, the Hang Seng up ½% and the ASX up 1% as a “surge” either.

I am beginning to wonder whether the crisis has been more in the press than in the real world in the same way as they got their knickers in a twist in the Spring over what would occur if the nation fell over the “fiscal cliff”? The key point which they will therefore most likely miss when Congress finally passes the necessary laws is that, irrespective of the outcome, the fiscal position of the Unites States remains on the critical list. The deficit remains stubbornly at 4½% of GDP but as the government cannot spend the GDP but only the tax take, the ratio of borrowing to spending looks much worse at, according to my own guess, something around 15%. The much vaunted sequesters have not fully kicked in yet and although the private sector is performing admirably, how much growth would be left if Federal and State authorities began to rein in deficits remains a moot point.

I’m not sure I will give any credence to statistics produced by the same people who believe that if shops remain open for longer people will have more money to spend and that winning the World Cup boosts GDP, even if they try to tell us that delays in Federal payments will cause the US economy to fall into recession and the rest of the world with it.

This really is the time to “Keep Calm and Carry On”.