DEFAULT? 4 QUESTIONS. 4 ANSWERS.

Takeaway: This whole mess likely gets resolved with a whimper rather than a bang.

Editor's note: In the interview below, Hedgeye Global Macro Head Daryl Jones clarifies much of the nonsense, half-baked truths and distortion surrounding fears that the United States is on the cusp of a catastrophic default.Click here to watch a brief default discussion between Jones and Hedgeye CEO Keith McCullough on HedgeyeTV.

 

DEFAULT? 4 QUESTIONS. 4 ANSWERS. - yoyo

 

Is the United States going to default on its debt?

 

The U.S. government bond market is signaling explicitly that the United States is not going to default.  Specifically, the credit default swap (CDS) market, while slightly elevated over the last couple weeks, remains well below a level that would indicate a credit event is imminent. 

 

Further, even if Congress did not extend the debt ceiling, both the Treasury Department and President have options to continue servicing U.S. debt.  Ironically, the deficit-to-GDP has narrowed from more than 10% to just under 4% in the last three years, which implies that U.S. is getting more, not less, creditworthy.

 

So why has the Obama Administration been peddling this “catastrophe” narrative?

 

The Obama administration wants to portray the Republicans in Congress as reckless in order to win the day on the Affordable Care Act.  The best way to do this is via fear mongering and scaring the voting public into believing that Republicans are willing to risk the economy in order to win an ideological argument. 

 

What is your thought on media coverage of this whole saga?

 

The media coverage, no surprise, is lacking in any context or analytics.  As a result, according to a recent poll from Rasmussen, more than 62% of Americans think the U.S. is likely to default on its debt.  The media coverage is shameful in that it is perpetuating a very, very unlikely scenario and thus scaring participants in the real economy and, frankly, hurting consumer confidence.

 

What’s your best guess on how this whole thing gets resolved?

 

This whole mess likely gets resolved with a whimper rather than a bang. 

 

Both parties realize that risking a default is not a practical negotiating tactic, so therefore will come to the table and negotiate a compromise.  It is likely that Obamacare remains largely intact and that the Republicans get some reduction in spending and/or tax reform to further bolster fiscal responsibility.  


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