The Lunatic Factor of a U.S. Debt Downgrade

Credit rating agencies and the general public cannot understand how the budget and debt ceiling debate have gone so far as to risk a U.S. government default. The answer is that group insanity has gripped Washington in much the same way that a mob mentality seizes lemmings that jump into the sea without explanation.

The lunacy of the behavior of Congress and the White House has made the decisions of what investors, companies, and local governments, which depend on the nation’s Aaa rating, should do all the more difficult. It has also undermined the ability of S&P, Fitch, and Moody’s to set a fixed date on which the U.S. debt should be downgraded.

If the political behavior about the debt were even partially rational, the painful preparation for a default could begin in earnest. Investor would be able to make provisions for the safety of their portfolios. Holders of U.S. paper would know when to cash out. The price of gold, as a result, would be more predicable than it is now. The flight to Swiss francs and Canadian ETFs could have a foundation in fact and not in fancy. Credit agencies could fix a time past which Washington has gone too far instead of a spread of dates for a possible downgrade that stretches for weeks.

The explanation for the length of the debate over the debt is that it is for long-term political advantage. The President wants a debt ceiling that will last well beyond the next national elections. That would save him being forced to explain why the government’s finances are not in good order. The Republicans could force the issue of profligate expenditure plans on the part of Democrats, if the debt ceiling needs to be debated again early next year. Of course, politicians think they know how voters will act to the current fiasco in Washington, but there is no way of knowing if that is true.

It has been said too often that voters and holders of U.S. debt have had their patience tried more than they are willing to accept. Congressmen admit that their offices are flooded with calls from nervous constituents. Those calls are an indication that a misstep in the budget debate could actually cost them their jobs.

The predictions of what will happen on August 2 are merely a guess, but the worst cases are almost unimaginable. It is also unimaginable that Congress and the White House would tempt fate to the extent that the financial system could crash down in early August. The rationality has gone out of the battle. It has become a situation of people hacking at one another for advantages that may not exist and perhaps never did.

Douglas A. McIntyre