Stocks are selling off on Monday after the debt ceiling debate escalated over the weekend. Speaking yesterday on ABC's "The Week" program, House Speaker John Boehner vowed not pass a so-called "clean debt limit" bill. Without the bill it becomes unlikely Congress will raise the debt ceiling by next week's deadline without some sort of resolution on the Affordable Healthcare first.
Boehner's angry protestations aside, the debt ceiling showdown is very much a game from an economic perspective. Politicians are playing a game of "Sorry!" (or perhaps "Risk"), they just don't seem to know it.
Think of the stand-off between Democrats and Republicans as being akin to the cold war or the classic Prisoner's Dilemma game theory experiment. The very best mutual outcome would come from cooperation, but neither side can trust the other to stick to an agreement. That being the case the only rational (if that word can be applied to anything in Washington, D.C.) outcome is to expect nothing to happen until there's some sort of Cuban Missile Crisis stare-down on October 17th.
"The idea that there would be a pre-emptive deal on Friday was a little mystery," says Yahoo Finance's Mike Santoli referring to the rally at the end of last week. The standard posture in the investment community is hoping the other side will panic and sell you stocks on the cheap. Buying the dip in 2011 paid off as did buying stocks ahead of the Fiscal Cliff at the end of last year.
Congress took control of setting the general debt ceiling in 1939. Since then its been raised more than once a year, on average. As people other than President Obama, Harry Reid, and John Boehner might expect, every debt ceiling boost has been subject to heated debate and last minute deal-making.
As far as trading goes the emotional cross-currents or "feedback loops" make trading the debt ceiling a crap shoot. The fact the U.S. has never defaulted on its debt before doesn't make doing so impossible. You can buy the dips, but if this becomes the first default in American history things will get ugly to say the least.
Ultimately investors are stuck in the same dilema as the buffoons we elected. All we can really do is complain about the lunacy and wait to see what happens on the 17th.
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