Fox News congressional correspondent Chad Pergram has the latest from Capitol Hill on Cavuto: Coast to Coast.
Astute investors rely on several key indicators to gauge Wall Street activity and the health of the economy. You can examine the price-to-earnings ratio or the dividend yield. Economists examine home sales or retail sales numbers for clues.
Is there a barometer to gauge whether the US will hit the debt ceiling in early June?
Not really. But maybe the “mattress futures index” would be a good place to start.
In other words, you could look at the mattress futures index to see if people have invested in many mattresses to determine the likelihood of a federal default. When people suspect the likelihood of default is high, they can stash their money under a mattress instead of leaving it in the bank. So they would stock up on mattresses. So the Mattress Futures Index (MFI?) is higher. If the MFI is lower, just leave your money in a traditional savings account.
SPEAKER LOBBY: NOT A WHOLE PAY RAISE
we joke
Kind of.
And for the record, the mattress futures index isn’t a real thing.
But should people really be worried about a potential default in early June?
Two factors are currently working against President Biden and Congress.
Time is an enemy. Mr. Biden huddles with the top four bicameral congressional leaders on Tuesday. But getting an agreement by the deadline would be a challenge – even if they did reach an agreement at the White House conclave.
President Biden on Friday called for tougher regulations against executives of failed banks. (Fox News / Fox News)
The other problem: the math. Why? Because Capitol Hill is always about the math. Congress has dealt with debt ceiling deadlines before. But it’s rare to attempt to address the debt ceiling in a political environment so calcified with a divided Congress and ultra-thin voting margins in both bodies.
The last real debt ceiling crisis swept Capitol Hill in the summer of 2011. The Tea Party House Republicans had just flipped the House at Midterms 2010, winning a staggering 63 seats. The Tea Party’s goal was to cut spending. Many Republicans won because they fought so aggressively against former President Obama. These GOP members loathed Mr. Obama. In fact, many archconservatives in the House of Representatives didn’t even want former House Speaker John Boehner, R-Ohio, to negotiate with the former president. And Boehner also had to keep his distance from President Obama – so that the conservatives wouldn’t suspect that the spokesman was too narrow for the president.
Everything is different this time. President Biden says he will not negotiate debt ceiling. So all Republicans have been railing against Mr. Biden for weeks for not negotiating with House Speaker Kevin McCarthy, R-Calif.
Additionally, some Republicans are skeptical about a potential default in early June.
“I think they’re manipulating the data. I don’t think it’s June 1st. I think it’s closer to sometime in August,” said Senator John Kennedy, R-La. “That June 1st date — I think that’s a political statement. No statement based on fact.”
The Treasury Department forecast months ago that the US could meet its debt ceiling deadline sometime during the summer. But two things have emerged: Federal revenue from the spring tax season is down. Second, the much-maligned Internal Revenue Service is now more efficient at processing returns. This allows the Treasury Department to more quickly predict the date when the nation could run out of cash.
Sen. Chris Coons, D-Del., said it was “dangerous” for his colleagues to question Yellen’s veracity about the debt limit.
“We should trust them. That’s their job,” Coons said.
There are even national security concerns that the US will hit the debt ceiling.
Senate Armed Services Committee Chairman Jack Reed, DR.I., put those very questions to Director of National Intelligence Avril Haines at a recent hearing.
“It would create global uncertainty about the value of the US dollar and US institutions and leadership, leading to volatility in currency, financial and commodity markets, which are priced in dollars,” Haines said.
What to look out for in the coming weeks are signals from the markets.
Markets have not publicly reacted negatively, which would bring those on Capitol Hill to notice. But examine some behind-the-scenes factors. Look at something called “credit default swaps.” This is a mechanism investors use to “insure” their bets on government bonds. The cost of this “insurance” is now expensive. This implies that trust in Treasuries is not what it should be.
SOMETHING HAS TO GIVE DOWN IN TIGHT LEVELS OF DEBT
US Treasuries have historically been among the most solid, low-risk assets on the planet. But when it suddenly costs more – a lot more – to insure your bet on getting your money back from the US government…
Speaker Kevin McCarthy (R-Calif.) speaks at a press conference in the Statuary Hall of the US Capitol Building January 12, 2023 in Washington, DC. During his press conference, McCarthy discussed a number of issues, including recently classified documents… (Anna Moneymaker/Getty Images/Getty Images)
Also, the Treasury has just auctioned one-month notes that are due in early June. The return on these switches rose to its highest level in history. The reason? Investors wanted an increase in their bills given the possibility of the government defaulting. Any distortions in what investors call the “Treasury yield curve” usually herald economic signs.
“We shouldn’t wait for the markets to get scared that rating agencies will downgrade us. All of these things will worsen our own economy and our overall budgetary position,” said Maya MacGuineas of the Budget Committee.
But at least one lawmaker isn’t too concerned about negative market reactions.
“Markets are very emotional,” said Sen. Kevin Cramer, RN.D. “They react to every geopolitical sneeze and every gas that happens anywhere. So I don’t usually worry too much about how the market reacts because they always bounce.”
Lawmakers are trying to figure out what the Treasury Department will do if the government defaults.
“I’d love to hear Janet Yellen tell us what the priorities would be. How would you prioritize expenses when all you have for a day, a week, or a month or months is the income that comes in?” Cramer said.
The following could happen:
Those of us in the media often try to equate complex financial and economic situations with everyday “bread and butter” circumstances for average Americans. We talk about “credit cards” and “loans” much like someone at home might talk about finances. Some of these analogies apply. Many are far from the base.
But when it comes to the debt ceiling, the credit card parallels are correct.
The Treasury Department is constantly bringing money in and pushing it out the door to pay off various debts. Standard paychecks for government employees. Replenishment of various pension funds for federal employees. Sending Social Security checks. pay contractors.
But when the government rams into the debt ceiling, the Treasury no longer has that “line of credit” to pay its bills. So Fox is told the government would probably do what most people do at home when they hit a credit limit on their credit card: pay the interest owed. It is believed that the federal government would pay that interest on the debt first.
“It’s going to prioritize interest and principal payments so it doesn’t have strict defaults on securities, on Treasuries, which would mess up financial markets,” said Wendy Edelberg, former chief economist at the Congressional Budget Office (CBO) and now a senior fellow at an economics major the Brookings Institution. “Then there are millions of people who are owed federal benefits like Social Security payments. We’re talking about millions of people who may not get paid on time. So that would certainly impact people’s wallets.”
Of course, Americans would argue that the Treasury should pay them first rather than someone else interfering.
Hitchhiking through McCarthy’s debt ceiling
“We have to pay off our old debts,” Cramer said. “So the first thing I have to take care of is how are we going to handle the interest on the debt? In other words, can we service our debt if we cannot borrow any more?”
Some Republican lawmakers tinkered with the idea of passing legislation that would require the Treasury Department to pay its bills when there is a default. But Congress—yet—cannot even pass legislation to address the debt ceiling. So this is problematic.
WASHINGTON, DC – JANUARY 2: US President Biden returns to the White House on January 2, 2023 in Washington, DC. President Biden returns from vacation in St. Croix. ((Photo by Kevin Dietsch/Getty Images)/Getty Images)
“We don’t want the Treasury to choose which payments should be timely and which not. We don’t want the Treasury Department to decide which agencies should be funded on a particular day or which program beneficiaries should receive their checks on a particular day. That’s up to Congress,” Edelberg said.
Edelberg suggested that unions or groups of people could then take the federal government to court to challenge who is paying or receiving benefits — or why they weren’t
“The legality of all of this is really very uncertain,” Edelberg said. “My guess is that the legal challenges will come immediately.”
All of this could lead to sharp falls in equity markets and rising interest rates as access to credit becomes scarcer.
But we don’t really know. Expectations will rise after Tuesday’s meeting with the President and senior members of Congress.
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Only one thing is certain at the moment: uncertainty.
We can talk about credit default swaps and distorted bond yield curves. But one thing to watch for soon could be the “mattress futures index.” And if Congress doesn’t act quickly, one could argue that mattress futures could be a good place to invest.