We are getting ambiguity left and right about what will happen when we hit the debt ceiling on Oct. 17. Will the government default on our bonds? Will we miss interest payments? Will our ratings be downgraded?
Or will it be somewhat like business as usual because the government will have some money on hand to pay the interest and any bonds that come due?
Given that we have had 17 government shutdowns previously and gotten through all of them without catastrophe, we know that this shutdown is no different. In fact, remember that the two shutdowns in 1995-1996 actually were catalysts that sent the market higher, not lower.
But we keep hearing that this time is different. Yesterday, Erskine Bowles scared a lot of us out of our wits when he said that if nothing is done about the debt ceiling by Oct. 17, it could be catastrophic for the public. President Obama was more circumspect in his CNBC interview with John Harwood, saying that we should all be concerned, that it's not business as usual.
However, Warren Buffett said this morning on CNBC that it won't be the end of the world and that we can go beyond Oct. 17 without problems, we just can't go for a year. I think he was being a little hyperbolic about a year, but he made it clear that the Oct. 17 deadline is artifice and plenty of money is kicking around to pay the interest on the debt and any bonds that come due. He made many of us feel a heck of a lot better about the issue, and given that he is a modern-day J.P. Morgan, it doesn't seem like our confidence is misplaced.
Buffett's comments were welcome because they put into context how you could have a continuing rally in bonds, not a sell-off as you would expect as we careen toward the so-called drop-dead date.
Think about it: Shouldn't bonds be crushed here, as foreigners sell and people retreat to something less risky? Oh, how the mighty might fallen, because it is absolutely true that the longer we go after Oct. 17, the more likely the risk-free designation for Treasurys will vanish and the full faith and credit provision be rendered meaningless. Still, Buffett defined the cooler-heads thesis for the moment.
But soon after Buffett's comments, Treasury Secretary Jack Lew came out swinging, making it very clear that catastrophe is still on the table come Oct. 18. He made it seem direr than ever.
What's the truth? We simply don't know, which is why former President Bill Clinton said in 2011 that the president should invoke the 14th amendment "without hesitation" to raise the ceiling and "force the courts to stop me."
Back then, the president quickly said his lawyers thought the argument wouldn't win. And the clause that emboldens Clinton, part of section four, is subject to a lot of interpretation. It seems like a winner if you read the phrase "The validity of the public debt of the United States authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion shall not be questions" out of context . You strip out the notion of insurrection-- as this was written after the Civil War -- and you have a good constitutional case.
More important, though, Clinton isn't saying the president would win. He's just daring the courts to agree and finding a way to pay those bills. Yes, it could be specious, but it wouldn't be outrageous to argue.
So who is right? If you are the president, you need to force the hand of the recalcitrant Republicans. But is the president miscalculating? There are congress members who want to stop the president and the runaway deficit so badly that they will contest the legality of going above the ceiling. Is there any difference between that and pleading the 14th amendment as a way to pay the bills? I don't think so.
Either way, I fall back on the full faith and credit of Warren Buffett. I think we will go through the Oct. 17, and I think that the stock market might go down into that day. But that we will live to play again no matter what -- and panic would not be an option because of this -- now looks more like just another political gambit. While certainly jarring, it simply can't be described as catastrophic until bonds are actually in default, and that's just not going to be the case come Oct. 18.