The U.S. Government Default Red Herring: The next chapter of the political squabbling will be a battle over the U.S. federal Debt Ceiling. A scare tactic used by those in favour of raising the Debt Ceiling (and thereby automatically increasing 70% of government expenditures) is that the U.S. will default on its bonds. The claim is that the interest on those bonds won’t be paid.

If there was any imminent threat of that, the market for U.S. Treasury bonds would be hammered. In fact, over the last week, prices of Treasury bonds have actually increased a little. Not much panic there!

Also, the cost of insuring U.S. Treasuries against default, while having risen a bit recently, is still below the level during the last default threat episode in the summer of 2011, and a fraction of what it was during the height of the global financial crisis in the 1^st quarter of 2009. So, not much panic there either.

The problem is that the proponents of raising the Debt Ceiling have used the word “default” without much thought or consideration. The U.S. is still hauling in about $280 billion in tax revenues every month. If paying interest on Treasuries is so important, they are going to make it a priority and pay it from the revenues collected. Other less critical expenditures might have to be cutback.

Despite all these shenanigans, so far the September – October stretch in the markets, which tends to be more volatile than other times of the year, does not look any more temperamental than usual.

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