US bond yields and the dollar hardly moved on Monday after the latest breakdown in talks on raising the country’s debt limit. Although there is only a week before the US reaches its legal overdraft limit, investors evidently still think it will be raised. If they are wrong, the market response could be dramatic. But even if that fate is avoided, the dangerous double debate will continue.
At an academic level, debate is healthy. The dispute over the role of government goes back at least as far as John Locke and George Hegel, it is fundamental, and no resolution is in sight. Professors and their students should be arguing about it.
Sadly, in the US this principled argument is entwined with an almost surreal one about the deficit, which is being argued out in real time in front of an audience of bond and currency traders. In the short term, that creates the risk of a default by what are deemed to be the world’s safest securities. Even if the Treasury ducks and weaves to avoid a default, cancelling whatever payments it can, the uncertainty over exactly which of its securities could be trusted as collateral could easily prompt a Lehman-style freezing of global money markets.