The last federal shutdown triggered a global market plunge. So far the financial adults in Washington have looked out for investors first.
With Congress’s failure to keep the government open draining about $2 billion a day out of the U.S. economy, it’s a blessing that the people who know how grown-up markets work are making sure the big wheels keep turning.
Steve Mnuchin is probably busy behind the scenes making sure the Treasury doesn’t default. Gary Cohn definitely is doing all he can.
After all, the government can shut down for days or even weeks and the world will get back to work once Congress authorizes the funding.
The bond market doesn’t work that way. If you break confidence in the “full faith and credit” of the U.S. Treasury to pay its debts, there’s no going back.
“Good” shutdown and bad
Mnuchin spent a lot of time last year pestering Congress to keep raising the federal debt ceiling. He’s been a lot more relaxed about keeping the current account afloat, occasionally pondering the possibility that some shutdowns are actually “good” as a vehicle for fiscal discipline.
The priority is clear. While the everyday work of the government isn’t essential, the real important thing is keeping the interest payments flowing so the bond holders don’t revolt.
That’s the Goldman Sachs ethos. It’s how cabinet officials who come from Wall Street naturally think.
Unfortunately bonds are selling off anyway. We’re living in a world where Bill Gross is actively bearish on U.S. debt. And with the Treasury’s credit already inches from its current limit, there isn’t a lot of margin for error.
Mnuchin has already triggered the “extraordinary measures” that slow an outright default once the ceiling breaks. He’s borrowing from the federal pension system in order to make short-term interest payments.
But at best that buys him until early March if the latest official forecasts are on track. He needs Congress to raise the ceiling in the next six weeks.
If it doesn’t happen, this will probably qualify as a bad shutdown. You remember the summer of 2011 when Congress held the Treasury hostage and earned the U.S. government the first credit rating downgrade in history.
Global markets nearly crashed.
At the time, Mitch McConnell called averting a Treasury default “a hostage that's worth ransoming.” Let’s hope he remembers that lesson in the here and now.
Transferring cash
One of those “extraordinary measures” involves tapping operating reserves all federal agencies are holding in order to keep funding essential services.
We’ve already seen budget officials raid the balance sheets of unpopular agencies like the Consumer Financial Protection Bureau. Presumably that money is flowing elsewhere through the system even as we speak.
The CFPB only had about $145 million in cash, which isn’t going to last more than a few hours. In the meantime, it’s hard to really imagine draining all the accounts will have much of an impact on the Treasury’s ability to make its payments.
As of Thursday, there was barely $24 billion of wiggle room left before hitting the ceiling. That’s 1% of 0.01% of the aggregate debt on the market right now — literally a single pip on the mountain.
Maybe that pip ticks away at the rate of $1 billion a day until we’re staring default in the face. Congress can eliminate the pressure with a single vote, but recent negotiations don’t exactly feed global confidence.
Back in 2011 it was a showdown like this that unnerved the rating agencies in the first place. The actual shutdown didn’t even happen — instead, we limped along on continuing budget resolutions for another two years.
If I were Gary Cohn, I think I’d be sleeping like a baby right now, by which I mean waking up in the middle of the night screaming. He’s got to get Congress to commit to something larger than themselves: the global credit system that runs around the rock of Treasury debt.
The adults in the room dropped the ball on the budget talks. Let’s hope they’ve been working overtime on the debt ceiling.
Otherwise, it could be shaping up to be a volatile year after all.
