You can be forgiven for confusing the ongoing debt ceiling debate with the 2011 debacle. Then as now, the debate points of contention were serious issues but the dialogue quickly descended into self-destructive inanity on both sides of the aisle.
In August of '11 America gridlock led to the U.S. credit rating was downgraded and markets were plunged into temporary chaos. It proved to be a buying opportunity but in reality this time might be worse.
According to Peter Schiff, CEO of Euro Pacific Capital and author of the book The Real Crash: America's Coming Bankruptcy, the best that can be said about our current situation is that we don't have to worry about another downgrade. The government made sure of that. "They already sued S&P (MHFI) for downgrading the U.S. last time," Schiff says, referring to a government lawsuit that Standard & Poor's claims is indirect punishment for taking down U.S. credit. "Nobody is going to downgrade the U.S. Treasury, no matter what."
Not that it matters to Schiff. The foreign nations buying US debt recognize a bad deal when they see it. Once those customers realize that Treasury paper is the equivalent of junk regardless of the official rating the buying will dry up and disastrous endgame will begin.
Count Schiff among those firmly believe the debt ceiling shouldn't be raised at any cost, even it means shutting down the government. Constantly raising the debt ceiling to, in effect, live beyond our means is the root of America's credit problem. Kicking the can down the road only makes the day of reckoning worse.
"The reasons we have to raise our debt ceiling is because we can't pay our bills," Schiff says. "We're broke and we can't pay for anything, we have to keep going deeper and deeper into debt."
Shiff actually ran for Senate to lead a filibuster, making sure the debt ceiling never got raised. He argues that doing so would force the government to cut spending down simply by depriving it of the funds. In theory he's on to something. In practice the debate over which programs would be slashed to meet the government payroll would make the ongoing debacle look like a flash in the pan.
Whatever discipline the Financial Crisis could or should have imposed on the government was more than offset by monetary stimulus. The Fed is theoretically apolitical, but in practice it is an enabler of both parties.
At the moment, Wall Street is betting that the debt ceiling will be raised or some form of meaningless compromise will be reached. When push comes to shove, America won't default and both sides are too married to pork to come up with real cuts. When balanced budgets come out of Washington it only leads to more spending. We are who we are.
With the ratings agencies either muzzled or irrelevant, the stakes are going to have to be raised before the public even takes serious notice of what's happening. History rhymes, but it doesn't repeat. If "this time is different" and the government is shut down, the air-pocket downside to your investments is sure to get your attention.
- Peter Schiff