- Joshua M Brown
- July 31st, 2011
Ladies and gentlemen, today is August 1st 2011. We are no longer flirting with disaster, we are getting to second base with it in the backseat at Inspiration Point.
The worst thing about these Tea Party assholes is that they're actually right - even as what they are about to do may go down as the worst self-sabotage in the economic history of the United States.
Any rational, non-partisan person can see that the reckless spending and gigantic government of the last ten years are absurdities that need to be corrected - but there is a time and a place. How dare these sonofabitches choose now to put the US on a collision course with a ratings downgrade?
How dare they stand in the way of a routine debt roll with over 9 percent of the workforce unable to find a job and at a time during which we're still trying to claw our way back from the worst recession in 70 years?
To be clear, the risk here is not one of real default or a lack of ability to make payments on the debt. The estimated interest on our debt for 2011 is somewhere in the neighborhood of $225 billion, a large number but not an insurmountable one when you consider that total revenues for the Federal government should exceed $2.228 trillion this year. For an illustration of this, please see the below chart via Barron's:
What we're really talking about is a rattling of confidence in the $14 trillion Treasury market, the most important asset class on the planet. Keep in mind that Lehman Brothers, which precipitated a global asset market crash less than three years ago, had total debt outstanding of just $600 billion, less than 5% of the US debt pile we're flicking a zippo in front of. While there are large and obvious differences between what Lehman Brothers was and what the US Treasury is, there is one commonality between these two situations that cannot be waved away: The fear of a large institution missing a debt payment causes a shockwave through global markets as people freak out and begin losing faith in everything.
This "freaking out" leads to a repricing of risk as everyone looks twice at what their capital is funding. Correlations shoot toward 1.0 and everything, safe or unsafe, is liquidated en masse. Raise your hand if you think a hardline "message" being sent is worth risking this...Yeah, I didn't think so.
I think we can all agree that a ratings downgrade will come come in the not-too distant future if we are unable to get serious about the budget and deficit. But to roll out the red carpet for that via technical default at this very moment just to "appease the base" is suicidal and, frankly, unpatriotic behavior.
I ask you to bear in mind that this intransigent clutch of radicals within the GOP have chosen to force this issue during a time when China, India and Latin America are tightening rates. In the meanwhile, Europe is in the worst shape its been in since the Bubonic Plague swept westward in the mid-fourteenth century, adding even more heat to the pressure cooker. And to top it off, our own economy is showing daily signs of weakening despite the ungodly amounts of stimulus we've seen thrown at it.
Now you'll have to forgive me, I'm not a Harvard Professor of Economics and so I can't tell you exactly what to do about a GDP run rate that's barely registering above 1%...but I can tell you what NOT to do: Chris Brown-ing the credit markets by forcing a ratings downgrade while simultaneously imposing a shock-and-awesterity on the middle class would pretty much guarantee a double dip (or worse). Go dig up Herbert Hoover and have Michelle Bachmann rouse him with an incantation. He'll school you, retards.
As to the Tea Party's insistence on a "balanced budget" constitutional amendment and the end of casual deficits? Okay - totally reasonable and I'd love to see them win out on both issues. In a true, unhurried vote, I bet they could. But at this moment we are in an emergency, largely a political one that they've forced upon us. A patient in surgery doesn't start exercising and eating a salad with his fucking chest cavity wide open on the operating table. Again, a time and place for everything.
There will be plenty of time to vote on spending cuts and amendments between now and the 2012 elections. In fact, let's make this issue the focal point of the 2012 elections for a change, instead of the gay stuff and the religion stuff the rest of us are so tired of. But come August 18th we've got a $29 billion payment due on debts we've already run up. Fiscally, there's no reason we can't make it. Not paying it will be catastrophic, regardless of what the lunatic fringe wants us believe.
Since these people like to dress up in costumes and embroider their rhetoric with Revolutionary War era motifs, here's a bit of a history lesson from those early days that ought to make it clear just how important not missing coupons truly is.
In September 1789, the recently victorious United States of America was saddled with a national debt accumulated during the war of $54,124,000 dollars. Alexander Hamilton was only in office as Secretary of the Treasury for ten days when the House of Representatives asked him for a plan. Europeans expected that there would be some kind of reduction in what the bondholders could expect from the fledgling nation and not a soul in America expected to be made whole.
And that's when Alexander Hamilton shocked the world and set the standard for what it meant to do business in America.
He told the House that every single promised penny would be paid to holders of United States debt. He insisted that foreign creditors get full principle and interest so as to establish the US as a serious entity. He also fought a brutal battle with Congress over whether or not the speculators who had bought up so many bonds from patriots and soldiers should be made whole. "But they're just miserable speculators, we don't owe it to them to pay in full," Congress said. But Hamilton strenuously disagreed and eventually carried the day. This was a great man who instinctively understood the importance of doing what you say you will do, political pressures be damned.
For these so-called representatives of ours to even consider the notion of betraying that legacy is completely beyond the pale. The potential damage to our still-fragile economy and the well-being of our citizens makes this type of behavior totally unacceptable. In fact, in an earlier time it would be considered borderline treasonous. The Merriam-Webster dictionary defines traitor as "one who betrays another's trust or is false to an obligation or duty." The duty of our elected representatives in the Senate and the House is to avert calamity, economic or otherwise, and often times this means compromise. You would think that people who like to wear tri-corner hats and powdered wigs on Youtube would understand this.
And the only thing worse than an economic dilettante voting idiotically in Congress is when someone who's actually worked on The Street acts like they don't know any better. For shame to the hedge fund managers and finance guys who are providing intellectual cover for the bastards who dare push this nation closer to the cliff's edge!
To Stanley Druckenmiller and the rest of the Oldtimers' Game brain trust, let me say this: Your ideas about missing a Treasury coupon "just to see what would happen" are so dangerous that I fear someone's been tampering with your meds. How is it possible that otherwise intelligent people could reasonably believe that the world's reserve debt instrument should be used for a political gambit? Mr. Druckenmiller (and friends), we agree on the need to get our house cleaned up, just not on your plan of swinging a wrecking ball at it to get the maids' attention. Congrats on your retirement, please don't feel the need to ever offer public comment again.
And finally, to the narrow group of GOP holdouts in the House who have thus far "refused to negotiate," even with their own party, I say this:
No matter how principled you think you are being, it doesn't give you the right to torpedo your own country just to make a point. Fuck your principles and your warped sense of conscience, start thinking with your brains instead. Before the situation gets away and there are no further options left to any of us.
Joshua Morgan Brown
August 1st 2011
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.