Power lines near Ulm, Germany, in 2006. (Alexandra Beier/Reuters) The week of October 4: a higher debt ceiling, higher energy prices, spending, American banking with Chinese characteristics and much, much more.
So, where were we? I was just getting ready to write about the debt ceiling (and, I suppose “the coin”), but the day was saved, if only for a few weeks, by the agreement to raise the debt limit by enough to see the country through until early December. Assuming that everything goes through (a House vote lies ahead), investors can relax, at least for a little while.
That said, while both sides are blaming the other for the impasse that brought the U.S. closer to a cliff than it should have been (NR’s editorial on that topic can be found here), no one should be under the illusion that running into that ceiling would be anything other than a disaster, with unknowable longer-term consequences. Once the dominoes begin to fall . . .
Writing in the Wall Street Journal on Thursday, James Mackintosh had a fascinating piece on how the markets had been beginning to get uneasy about what might happen:
Treasury bills this month started to price in the danger that there would be a temporary problem. The yield on the T-bill due to mature on Oct. 26, shortly after the debt ceiling would most likely be breached, jumped from 0.05% at the start of the month to 0.15% by Tuesday. It collapsed back to 0.08% after Senate Minority Leader Mitch McConnell offered a two-month suspension of the debt ceiling. The government was paying more than highly rated companies for some short-term borrowing.
Officials talked up the disaster scenarios in an effort to bring around Senate Republicans, with Treasury Secretary Janet Yellen saying a default would “likely precipitate a historic financial crisis.”
Yellen has not distinguished herself since taking on her current job, but she was not necessarily wrong about that.
Back to the WSJ (my emphasis added):
Investors never thought any problems would last. Yields on bills maturing in December had fallen,
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