Flirting with default will cost us (eventually)

Illustration: Aïda Amer/Axios

The debt ceiling circus has arrived in D.C. and seems poised for a monthslong stay.

The big picture: The closer Uncle Sam comes to potentially stiffing creditors, the bigger the implications will be for the markets and the economy.

Driving the news: While the debt limit was hit last week, it just means the Treasury Department has to start using “extraordinary measures” (i.e. accounting maneuvers) like running down cash balances — and deferring contributions to certain government pension funds — to keep paying its bills.

State of play: Treasury says it can keep juggling payments at least until June.

  • Wall Street analysts say Treasury could actually keep it up until August or September before it really comes close to running out of money. But nobody knows exactly, because it depends on the flow of Federal tax receipts and outlays.

Between the lines: For now, markets don’t seem to be too worried.

  • Stocks were down slightly last week, but mostly because of soft economic data on retail sales and industrial production.
  • There have been some tiny tremors in markets for Treasury futures and credit default swaps — a kind of insurance against default — on U.S. government debt. That’s generated a few headlines, but they’re really not a big deal.

Yes, but: The more drawn-out the debt ceiling fight gets — and the closer the government comes to outright default — the jumpier markets will get.

Flashback: That’s what happened in the summer of 2011, the last time we came close to going over the edge into default.

  • That year, as the crisis intensified over July and into early August, the S&P 500 plunged 15%.

  • During the same period, credit spreads that determine costs for home mortgages and corporate borrowings jumped, as investors grew leery of lending in the face of growing risks.
  • Consumer and business confidence fell sharply.
  • And GDP contracted during the third quarter of 2011.

The other side: Those who want to cut government debt levels may argue that the ruckus the debt fight raised was well worth it.

  • The Budget Control Act of 2011 — the law that emerged from that debt limit fight — helped cut Federal deficits sharply in subsequent years.
  • Those tightened belts lasted until the Trump tax cuts of 2017 blew out government deficits again.

The bottom line: The fight over raising the debt ceiling and avoiding default is going to hang over the markets for most of the year. And, at least for investors, it’s likely to be a bummer.