Shell Game
Government Reaches Debt Ceiling. Treasury Secretary Tells Congress He’ll Keep Borrowing By Withholding Pension Payments and Accounting Tricks
By Art Gallagher
Treasury Secretary Timothy Geithner is taking a page from the States playbook and balancing the federal books by delaying pension payments.
In a letter to Congress, Geithner he will immediately halt investments in two big government pension plans so the government can continue to borrow money even though the $14.3 trillion dollar debt limit was reached yesterday, according to an Associated Press article.
Even though the government has reached its official borrowing limit, Geithner said unexpected revenue and bookkeeping maneuvers will allow the Treasury to continue auctioning debt for another 11 weeks.
What would our governments do if they didn’t have pensions to play with? What would be the consequences of a private sector CFO making a similar move?
Stanley Druckenmiller, a “legendary investor” who was once a fund manager for George Soros, told the Wall Street Journal that a “technical default” or short term delay in government debt payments would be preferable to the status quo of continually raising the debt limit without fundamental reform of how the government spends money.
“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.
Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.”
Druckenmiller says the current market for government debt, and low interest rates are part of the shell game:
Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government’s financial future can’t really be that bad. “Complete nonsense,” Mr. Druckenmiller responds. “It’s not a free market. It’s not a clean market.” The Federal Reserve is doing much of the buying of Treasury bonds lately through its “quantitative easing” (QE) program, he points out. “The market isn’t saying anything about the future. It’s saying there’s a phony buyer of $19 billion of Treasurys a week.”
Hat tip to Bob Ingle for the WSJ article.
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