Applause for Debt-Ceiling Courage
David R. Kotok
February 18, 2014



Two good things happened in Washington, DC. One received mass media fanfare, while the other escaped the radar. They are linked.

Twenty-eight Republican members of the House of Representatives, including Speaker John Boehner, voted for a clean debt-ceiling increase. Those 28 Republicans were joined by 193 Democrats. Those Republicans and Democrats should be applauded for doing the right thing for the US. Their motivations may be partisan politics; but, that said, the outcome puts the good of the country ahead of political party.

A clean debt-ceiling bill postpones debt-limit political squabbles until early 2015. It relieves a huge uncertainty that impacted the markets and economy. By using the debt limit as a political tool in the fight over spending initiatives, the Tea Party-esque conservative Republican wing introduced additional risks and costs to every business, investor, foundation, charitable institution, and other financial organization in the US. The debt limit squabble is a political contrivance. It represents a fiction. Everyone knows it.

No one in the world expects the US to default on its debt. It has no reason to do so. US debt is a preeminent high-quality promise to pay in a timely way. It is an obligation with the capacity of the world’s largest economy behind it. It is also denominated in the US dollar, which is the world’s reserve currency and which dominates transactions globally. The Tea Party Republicans and the couple of Democrats who joined them in an attempt to use the debt limit as a blunt tool to hack at budget priorities performed a horrible disservice to the US and all of the constituencies within it.

Please understand that we have no issue with a fight over spending priorities and taxation policy. Grappling with such issues is what our political system does, and that is why we elect a Congress. The fault we find is that members of Congress used the debt limit as the vehicle for the fight.

We applaud the 28 Republicans who, along with the Democrats, courageously cast votes to get a clean debt-limit bill passed. They face political attacks within their own party, launched by Tea Party primary entrants who will urge voters to show them the door come Election Day. That is all the more reason to support those Republicans who put their country and conscience ahead of their party.

The resolution of the debt-ceiling debate is good medicine for the recovering US economy, and its beneficial effect is already visible in the short-term interest rate sector of the financial markets. These markets are now clearing in the short end of the yield curve. And that is the important news that did not make the headlines.

The combination of the Treasury’s new floating-rate notes along with the use of repo and reverse repo and the forthcoming issuance of large amounts of Treasury bills has impacted the markets in only a minimal way. Think about the fact that billions in short-term paper is now rolling in the Treasury market with no apparent volatility or dislocation. The US Treasury will be able to send tax refunds out on time. The Treasury will be able to easily issue up to $100 billion tranches in Cash Management Bills without any difficulty. One can quickly see the huge benefit that was obtained by all involved in short-term funding because those 28 Republicans had the courage, political will, and foresight to avoid another costly debt-limit fight.

In other words, the whole process is going to work; and because it will work smoothly, it will not get any attention. No headline in the media will say, “Money markets functioning well.” No one will take the stage on Bloomberg Television, Reuters, Fox Business, Yahoo Finance, Al Jazeera or CNBC and pronounce how easily and smoothly the clearing mechanism of payments is functioning. The dividends paid by political courage will not make any news.

That is a shame. It is very big news when the system is working. But as jaded American observers, we tend to pay attention only when there’s a crisis. When the system is working, we take its functioning for granted and move on to other matters.

This writer watched interviews with the detractors who promoted Tea Party disruption. However earnest their intentions, to accomplish their ends they would restrain the functionality of our financial markets and impose risk premia and additional costs on each and every one of us. Some of them are politicians who cannot see the workings of the world except through the myopic lens of their own rigid ideologies. Others are commentators who join them to fan the flames of Tea Party sentiment. All of them promote injury to the US even as they try to advance fiscal spending restraint. We support restraint; we condemn raising risk premia needlessly.

Of course this is a personal view, written by one individual who follows financial markets closely. Like so many others, we are quick to criticize when we do not like political actions. But the economist in us seeks symmetry. Therefore, we must also be quick to praise when praise is justified. Supporters of the clean debt limit helped all of us.

By shrinking risk premia in globally correlated markets, all of us benefitted.  Thus, praise is warranted, especially for the 28 Republicans who voted “aye.”
David R. Kotok, Chairman and Chief Investment Officer

Category: Politics, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Applause for Debt-Ceiling Courage”

  1. RW says:

    It seems rather odd (to say the least) to praise a putative lawmaker for not forcing their country into an unprecedented default by refusing to pay for spending they themselves already authorized and the fact that only 28 members of the majority party joined in that effort is not what anyone would consider a real confidence builder IMHO.

  2. Iamthe50percent says:

    Joining your applause. That’s four hands clapping.

  3. WickedGreen says:

    Charles Filmore is dead, but he will live long.

    In his honor, I will commend you for – however meekly – bypassing the increasingly desperate attempts of the Republican Party to sever itself from … itself.

    The “Tea Party” is a neat vehicle, in the form of a costumed label, for trying to frame away the fact that a percentage of the GOP are deranged, unhinged, RADICAL lunatics.

    “Tea Party-esque conservative Republican wing” is a good start.

    It’s simpler, however, to refer to them as what they are: Republicans.

  4. Bob K. says:

    LOL, so per David Kotok the main uncertainty is the debt ceiling. I went to my bank and asked them to raise my debt ceiling and to reduce my loans to .25% and to give me unlimited time to repay. Funny, they said that would be irresponsible, hmm.

    As long as those banks get free credit to speculate in the market, Main Street be damned. As an owner of two real businesses I can tell you the debt ceiling talks were off of my radar. Now that we can spend freely and the dollar keeps falling, I worry about how energy costs and health costs, and food costs that are spiraling out of control are going to affect my clients ability to buy my stuff.

    This stuff is not going up due to economic expansion as there is none, it is going up because we have too many dollars sloshing around the banks in which they speculate with credit I am backing, which then works against my business interests. This, the press praises.

    • The Dollar is about where it was 5 years ago — it did lose 41% of its value from 2001 to 2008, but that collapse was last decade.

      As to debt ceiling, you cannot vote for spending on one hand but not pay for it on the other.

      • Iamthe50percent says:

        I know lots of people who do that. Then they wonder why I have a good credit rating and they do not.

      • LeftCoastIndependent says:

        Exactly. That is why bills should not be passed to begin with unless they are paid for.

    • DeDude says:

      I guess not having time to read about and understand the basic concepts does not prevent you from writing about them.

      Spending is authorized by spending bills and those who vote in favor or them have implicitly decided to increase the debt by whatever amount the spending exceeds the tax income. Spending is not affected by the debt ceiling, default is.

      The debt ceiling bill is about whether or not the US government (we the people) are despicable deadbeats who borrow and spend money, then refuse to pay it back. It does not contain a dime worth of spending authority it is all about whether or not we will pay those businesses that provided us their services and products. So think about that as a business owner, someone get your products and services, then they refuse to pay you – is that what you want your government to do?

  5. Moss says:

    Amazing that these courageous Republicans requested that their vote be done in silence and after the fact. They are cowards in reality since most of them know that voting no is a fools errend.

  6. Livermore Shimervore says:

    @Bob K,
    Do you have money in the U.S. stock market? If so you benefited greatly from all this “non-expansion of the economy”, dollar sloshing, and credit speculation by the banks which works in the interests of your customers who spend to buy your stuff. Funny how some forget that their customers have indeed benefited greatly since the 2008 crash. As an investor, I can’t think of a better stretch than what we’ve experienced since 2009. Such things tend to spur consumption and its multiplier.

    As to going to your bank to ask them to raise your debt ceiling I’m sure they pointed out to you that you’ve already spent that money and payment is expected promptly. Should you wish to reconsider your spending habits you might want to do that before you actually spend the money and the creditors come looking for payback. Otherwise it reminds me of the guy who goes to the steakhouse buys dinner for all his buddies, drinks all around, big bowls of berries with schlag and then demands that the restaurant owner come out and reduce his tab limit AFTER he’s had his fill crying that such spending is immoral.