Economy Watch: The Loud Ticking of the Default Time Bomb

3 min read

Rating agencies wait to see if Congress can get past its political blockade, and Bernanke warns of the consequences if they don't. A Pulse of Commerce Index shows an economy in idle.

The default countdown continued on Wednesday unimpeded by progress on a deal to raise the federal debt ceiling. In an unexpected development, Senate Minority Leader Mitch McConnell (R-KY) warned members of his own party that a default would be bad for Republican election prospects next year (besides throwing a monkey wrench in a weak economy). McConnell then floated a Rube Goldberg-like solution to the problem that would essentially allow the president to raise the debt ceiling, unless Congress did not approve, in which case the president could veto the not-approval, and thus the increase would be approved. This would be done three times.

The president, for his part, told CBS on Wednesday that he cannot assure the nation that Social Security checks will be processed on Aug. 3. “There may simply not be the money in the coffers to do it,”  he said. That’s certainly a possibility, but it also counts as a negotiating tactic known as “holding your opponent’s feet to the fire.”

Meanwhile, rating agencies are muttering darkly about the top-drawer rating of the sovereign debt of the United States. On Wednesday, Moody’s said that it “has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations.”

Bernanke tells Congress to act

Ben Bernanke, speaking to the House Financial Services Committee on Wednesday, mostly talked of monetary policy, that being the central bank’s bailiwick. But he spent a while warning Congress of the perils of default. It was unusually strong language for a central banker.

“The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy,” Bernanke said. “The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending.”

Regarding more Federal Reserve stimulus–another QE, sometimes called QE3 but also QE2.5– Bernanke was a little more indirect. He did say, however, that the Fed stands ready to help out if the economy continues sputtering.

“Although we are no longer expanding our securities holdings, the evidence suggests that the degree of accommodation delivered by the Federal Reserve’s securities purchase program is determined primarily by the quantity and mix of securities that the Federal Reserve holds rather than by the current pace of new purchases,” the chairman said. In other words, the new QE might not involve expanding Fed holdings, but re-arranging them in ways the central considers economically salubrious.

Pulse of Commerce weak, but better in June

The Ceridian-UCLA Pulse of Commerce Index (PCI), released on Wednesday by the UCLA Anderson School of Management and Ceridian Corp., rose 1 percent in June, a rebound following declines in the previous two months. Despite the stronger performance in June, however, the economy continues to remain in idle, with the PCI remaining below its level at the end of the first quarter of this year.

“Over the past year the U.S. economy has been in ‘she loves me, she loves me not’ mode,’ ” says Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast, in a statement. “Bad news has been alternating with good, leaving investors and forecasters nervous and unable to identify sustainable trends.”

Wall Street hasn’t been able to identify a trend lately, either. The Dow Jones Industrial Average’s arc was rainbow-shaped on Wednesday, first way up then down. In the end, the index was up 44.73 points, or 0.36 percent. The S&P 500 gained 0.31 percent, and the Nasdaq advanced 0.54 percent.

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