The Debt-Ceiling Panic that Wasn’t
The Democrats would have you believe that the current fight over raising the debt ceiling is a game of Russian roulette with the economy at stake. But people with money on the line — Treasury bond investors — do not seem to think that a default is exactly at hand. Bond yields are in fact quite low. I do not expect that to last forever, but the idea that we are seriously at risk of defaulting as a consequence of the debt-ceiling fight is a bunch of sound and fury signifying nada, mostly intended to preempt debate and minimize Republicans’ ability to pry further spending concessions out of the Democrats.
Don’t believe the hype.
What’s Turbotax Timmy up to in the mean time? For one thing, he’s putting the ongoing bailout of state and local governments on ice. (No, it’s not an infrastructure project; it’s a bailout.) That is a good in and of itself, and to be celebrated. Treasury has been issuing a whole lot of “State and Local Government Series Securities” (SLGS), which are kind of an interesting thing. Treasury created the SLGS in the 1970s to help state and local governments effectively break federal law. Congress passed a law that stops state and local governments from issuing tax-free bonds at one rate and then earning arbitrage profits by reinvesting the proceeds at a higher rate. Since the locals can’t do that with their own tax-free bonds, Treasury created special securities for precisely that purpose. (And you thought Congress made the laws!) State and local budgeteers are up to their green eyeshades in debt (not to mention enormous pension liabilities for ex-bureaucrats sunning themselves on retirement-community beaches), and Treasury is helping them avoid the consequences of their decisions.
Bailout Nation lives, and one of the main reasons that Washington wants to raise the debt ceiling is that it wants to continue to camouflage how bad the overall, coast-to-coast, comprehensive government-debt situation is.