The Calm before the Manufactured Storm

Default or no default, trouble darkens the horizon.

Even as House Speaker Kevin McCarthy says, “We are nowhere near a debt ceiling deal yet,” the stock market is, by one measure, at its calmest in over a year. Apple stock is nearing the $3-trillion valuation summit again, and Bank of America is pushing its projecting for the S&P higher to 4300, and the NASDAQ is climbing, climbing, climbing, albeit nowhere near its former peak.

Yet, the White House is warning that a looming US debt default will cause stocks to plunge 45% and will crash the US into a deep recession. JPMorgan’s CEO, Jamie Dimon, is said to be in a bit of “panic,” though he didn’t sound panicked to me, as he warns that commercial real-estate woes will be the next stage in an ongoing banking collapse. He’s right about that, but more immediate troubles are gathered all around us.

Did you know, however, that failure to raise the debt ceiling will not force any default on Treasuries for years to come? Not even the slightest chance. You may be surprised to hear that, but it is a fact … unless the White House decides to create an all-out constitutional crisis by making payment of US debts it lowest priority. That would be a political retribution choice, however, not a situation created by failure to raise the debt ceiling. Nevertheless, all sides want to talk in the starkest terms in order to increase bargaining pressure at the risk of triggering a credit downgrade.

The fact that failure to raise the debt ceiling has no potential to create a default on its own, however, does not mean credit agencies won’t downgrade US credit ratings before a failure to reach a debt-ceiling agreement. That will cause its own credit problems for the US if agencies get itchy trigger fingers. I think the chance of that is a little less likely than in 2011 when I was certain it would happen, and it did, which is far from saying it won’t happen again.

You see, in 2011, when Standard & Poor’s was the first and ONLY agency to downgrade US credit, it got sharply rebuked by politicians and marketeers and by its competition because politicians ultimately reached a deal, and nothing bad happened with US debt, outside of the impacts created by S&P. Still, they only did what a credit agency is supposed to do and called out future risks by giving the US a negative outlook over its willingness to play games of brinksmanship with something as important as credit. The scorn S&P received back then will make all agencies reluctant to become the solitary leading foot in a US downgrade today.

If you think in a nuanced way, you may recall that the argument back then was not so much about a debt default if the debt ceiling was not lifted, which is where politicians and the entire media that parrots whatever it is told want to peg the argument for maximum impact today. Back then, the debate was centered more where the only real risk is — a partial government shutdown. Newt Gingrich boasted that he’d be glad to shut down the government and that everyone would thank him for that. As that began to actually unfold, it turned out people were not so thankful as he had thought!

Yes, there was talk of default and of failed Social Security payments, both of which are completely illegal, but most talk was of a government shutdown (which might delay the physical realities of issuing those SS payments due to lack of staff for processing). Failure of SS payments didn’t happen even as some parts of government shut down.

I will be explaining how default cannot be forced by failure to agree on lifting the debt ceiling in detail in my next article on The Great Recession Blog, which I hope will be up late today. So, keep an eye out for it. I will also explain why actually reaching an agreement on the debt ceiling is likely to be damaging to stocks in the short term due to immediate financial realities. Whether we reach agreement or not, stocks have big trouble ahead for different reasons caused by either scenario; yet investors seem, as usual, blithely in denial of the trouble right in front of them.

As if the debt ceiling fiasco is not enough turmoil on the immediate horizon, major indicators are emerging in housing and manufacturing that signal rising inflation pressures have returned. That means the Fed will be pressured to keep up the inflation fight, even as Jamie Dimon’s feared second wave of bank collapses shows up in the months ahead.