Treasury Secretary Lew has used this date as a deadline for the end to his cooking of the books. He will run out of “extraordinary measures” to keep cooking the books.
To deal with this, he must prioritize payments: who gets what. He says he will not prioritize. If he doesn’t, then he will have to break the law. He will have to keep borrowing money, even though the law says he isn’t allowed to. He will call Ben Bernanke and say “keep buying our bonds.” Bernanke will do just that.
It will be great fun to see what he does. He will backtrack on something he has said: no prioritizing, or no more extraordinary measures, or not borrowing after the official figure goes over $16.7 trillion.
The sky will not fall, one way or another. The government will go on. There will be no collapse of the stock market or the bond market. Investors will wait and see.
If not much happens, the public will decode that it will not be so bad. Voters will watch cable TV, chat on Facebook, and go on with their lives. The President will demand that the House pass a “clean bill” and stop holding America hostage. Boehner will say that the President must negotiate on delaying ObamaCare for a year, as if a delay of one year were meaningful.
Meanwhile, nothing much will happen on October 18, October 19, and October 20.
The government will borrow from Peter to pay Paul. It always does. It has been doing this ever since 1837, the last (and only) year in American history when the federal government had no debt.
Could the federal government’s debt receive a downgrade from the ratings agencies? Yes. Will that mean much? No. There will be higher interest rates, we are told. When 3-month T-bill rates are 0.5%, a move to 0.7% will not make much difference. A move to 1% would not make much difference. These are historically low rates.
If investors and the public cease worrying about deadlines, then the politicians can play kick the can with the debt ceiling. Both sides will find that the other will not budge. If the negative sanctions against coming to an agreement do not impose pain on the elected participants, the rhetoric will go on.
The longer kick the can goes on, the less that Congress will be able to get done. With all eyes focused on the debt ceiling, the less possible it will be to get bills passed into law. It will stymie Congress.
ObamaCare already looks like the one and only big-ticket program that Obama will get. The next President may get none.
Conclusion: the longer the government can stall on the debt ceiling, the better it is for the country.
It will be entertaining to see which side backs down. Obama and Boehner have a lot riding on their reputations as refusing to compromise on this issue, since they have not been known as hard-liners in the past. There are probably office pool bets on which one will back down first.
The longer nothing happens, the better. The public will learn to ignore the politicians’ warnings. Distrust in the Washington Beltway will grow.