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With Congress raising the debt-ceiling and both sides of the aisle grumbling about the outcome, the debate over the mechanics of paying for the U.S. government’s obligations and the close call with default now fades back into obscurity.
Until the next time.
Assuming Congress won’t do away with the debt ceiling and push all spending debates into budget and appropriation legislation where they rightly belong, the country’s latest pullback from the edge of default won’t be its last.
It may be a few years, or well down the road; that will depend entirely on the makeup of the House and the Senate and the balance of power between the parties in Washington whenever the debt-ceiling comes back into play.
But the experience we just lived through leaves behind an ominous message that no one should forget as the debate falls back into the legislative shadows: Next time, things will be different.
“ The four most-dangerous words in investing are ‘This time it’s different.’”
Legendary investor Sir John Templeton long held that the four most-dangerous words in investing are “This time it’s different.” He pointed out the folly of forgetting that everything new is actually old again, a variation on history or a slightly different twist, but not so independent that it falls outside the realm of what investors know.
The problem with future debt-ceiling debates is that everyone has now accepted that the politicians will find a way to reach a deal at the last minute, no matter what.
That’s still the expectation, even though it’s worth noting that if U.S. Treasury Secretary Janet Yellen’s initial estimate of June 1 being the day the federal government would go into default had been correct — instead of being revised to June 5 — a default would have happened this time.
Moreover, Americans are tired of the debate and the scary headlines over it, even as many of them acknowledge in a variety of polls that they’re not well-versed in how the debt-ceiling works.
As a result, attitudes have changed every bit as much as the political scene since 2006, when the debt-ceiling morphed from a minor chore to maintain a functioning government into a political football.
Several polls have reported that Americans were more worried about the potential for a default and the impact it would have on them in 2011 than they were this year. 2011 was the first time the process got really ugly, working right down to the deadline before being resolved.
That was the year when credit-rating agencies cut the United States’s credit score, removing America from their list of risk-free borrowers; the country’s credit rating hasn’t been restored since, though the government has never missed any of its payments.
“ Fewer Americans have been concerned about a potential default; they expected a last-minute deal all along. ”
In those times, investor concerns showed up in the stock market, which got nervous and antsy and created more pressure for legislators to resolve the impasse.
This time, however, fewer Americans have been concerned about a potential default; they expected a last-minute deal all along.
Scott Wren, senior global market strategist at the Wells Fargo Investment Institute, said in a recent interview on my Money Life with Chuck Jaffe podcast that that while the media coverage of the debt ceiling scared people, he felt most investors recognized that Washington’s conflict is an opportunity [for investors] because in the end the U.S. is going to pay its principal and interest that’s due.”
Indeed, in the current case, the stock market has been more interested in riding the artificial-intelligence wave up than worrying about a default. The market has largely ignored scary headlines.
That’s why — unlike debt-ceiling crises in 2011 and 2013 when the market had a sell-off leading up to the so-called X-date — current conditions have remained benign. Investors seeing “opportunity” have buoyed the market, generating little or no pressure to get things resolved.
If investors greet future debt-ceiling debates as investment opportunities, potential outcomes change. The credit-rating agencies — seeing the ho-hum from Main Street investors — reconsidered their role in this process; they held off from another ratings cut and its long-term consequences, but just barely.
Last week, Fitch Ratings fired a shot across the government’s bow by placing the U.S. “on watch” for a downgrade, which it called a reflection of “increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit.” That real threat didn’t get the debt-ceiling deal done any faster.
Which brings us to what to expect the next time this happens.
Obviously, political circumstances will dictate the specifics, but with the public tired of the rhetoric and expecting an inevitable 11th-hour save, the potential to mess things up rises dramatically.
The ratings agencies will push for resolution, but will downgrade faster if they don’t see it happening. Where experts like former Treasury Secretary Larry Summers went into this debt-ceiling showdown saying they felt there was maybe a 2% chance of a default, the next debate — whenever it happens — will start with the odds of default being much higher.
If I had to guess, the next debt-ceiling crisis flirts with default and maybe even crosses into that territory for a matter of hours. The one after that — because this crisis will happen over and over barring some massive change in the political climate — will result in an actual default. That’s when we’ll find out if the results are as devastating as pundits expect.
For investors, it means the chances of default in our lifetimes has gone way up, casting a shadow on the ways we invest, how we plan for retirement assets and more for the rest of our lives.
That’s a real loss, no matter your politics, but don’t let that painful lesson get lost in the posturing that legislators do now. This is the road we’re on, and the can that’s just been kicked down the road will be upon us again in time, and then it will be even harder to deal with.
More: America’s debt-ceiling debacle is far from over
Also read: There’s a clause in the debt-ceiling deal that means bad news for Social Security
