I was taking a break from the meanderings of the S&P 500 (SPY) and the US Treasury bond market (TLT) yesterday when I came across an interesting YouTube video in which Stephen A. Smith, a well-known sportscaster and insightful social commentator, related how he had been thoroughly convinced by the dominant mass media coverage that George Zimmerman was guilty of the murder of Trayvon Martin. When he learned through the news media that Zimmerman had, in fact, been acquitted by a jury, Smith says he was shocked, hurt and outraged.
Troubled by this deeply bewildering outcome, Smith says he decided to study the case in detail by reviewing YouTube videos of the trial, reading expert analysis and so forth. In the end, to his own surprise, Smith became convinced that the evidence presented at trial simply did not meet the burden of proof that was required and that it was therefore understandable that Zimmerman was acquitted of the crimes he was charged with. One of Smith's main take-aways from this experience was that a news "narrative" as developed by the dominant mass media can be very different from actual reality.
Smith's analysis seemed apropos as I reflected on the current mass media narrative of the recent government shut-down, debt-ceiling crisis and "near-default." Upon reflection, I believe that it becomes clear that the reality of this situation is very different than the one which that the average person is likely to perceive if they have merely been a passive consumer of news media, as 99% percent of the general public is.
Pursuant to this theme, in this essay, I will analyze three "facts" as presented by the mass media with regards to the debt ceiling crisis that are very different from actual reality.
1. Mission accomplished! Based on the dominant media narrative, one would be led to believe that both parties in the US got together, made tough political sacrifices, compromised and "finally got the job done," in the best interests of the American people. Really? Ask yourself what was accomplished? The answer is, nothing. Both politically and economically, the US is simply back to square one. No progress has been made, whatsoever.
Interestingly, equity prices reflect this non-accomplishment: The major stock market indices such as the S&P 500 and the Dow Jones Industrial Average (DIA) are simply back to where they started before the government shutdown.
The reality is that the major political parties in the US have simply agreed to put off dealing with the fundamental problems for a few more months, with absolutely no progress made toward a solution of the US's fiscal problems. In the meantime the US is frittering away US financial and diplomatic prestige around the world.
2. Default was narrowly averted. Some might counter the above by saying that "the US was on the verge of default and at least that catastrophe was averted." My answer: The US was never on the verge of sovereign debt default; sovereign debt default by the US has never been and is not a real threat. Why? The US constitution and various US laws require the US Treasury to prioritize debt payments over any other type of expenditure. In any given month, the US Treasury collects far more in tax revenue than it must pay in interest payments on its debt. Furthermore, the ability of the US Treasury to roll over existing debt principal is not affected at all by the debt ceiling and therefore the Treasury can do so indefinitely. Thus, the threat of a sovereign debt default is zero, for all intents and purposes.
Don't let Treasury Secretary Lew fool you with rhetorical tricks that try to create an impression that drastic spending cuts triggered by prioritization would be "default by another name." There is a very good reason that cuts to government spending are not called default: It is because they are fundamentally different things. That is why we have something called language: It helps us make important distinctions among things that might otherwise be unintelligible. Just as cutting non-debt service expenditures do not constitute a sovereign default and do not have the same implications, a dog is not a cow nor does it produce the same amount of milk just because they both have four legs.
Interestingly, stock prices seemed to have implicitly reflected this basic understanding. Do you think that stock prices would only have been positioned 3% below their all-time highs if the threat of sovereign debt default were actually real? The fact of the matter is that if the threat of default were actually real and imminent, the S&P 500 and the Dow Jones Industrial Average would probably have been positioned at least 20% lower. Why? Because, if a serious default had actually occurred, the S&P 500 and the Dow Jones Industrials would have ultimately collapsed by 50% or more.
That brings up an interesting question: Why do both parties insist on talking about "default" when it is, in fact, not a real threat at all? Part of it is ignorance by some legislators that don't understand the issues. But to those who actually understand the issues, it is clear that the phony threat of default is something that is merely a demagogic artifact used by leaders of both parties to avert something entirely different that would transpire if the debt ceiling is reached and the Treasury were forced to implement prioritization: Deep spending cuts to their favorite programs such as defense (favored by Republicans) and social welfare (favored by Democrats). The fact is that 11th hour agreements are reached because politicians don't want draconian cuts implemented to their favorite spending programs, not because there is any real threat of default.
3. Democrats won, Republicans lost. Saying the Democrats won and that the Republicans lost this debt ceiling battle is like saying that the Gauls led by Vercingetorix defeated Julius Caesar and the Romans at Gergovia. Both claims, while narrowly true, completely miss the point. The fact of the matter is that by the time of the Battle of Gergovia, the Romans had already penetrated deep into Gallic territory and were dictating the terms of engagement in the Gallic Wars.
It's the same with the current Fiscal Wars. It's the Republicans who are dictating the terms of engagement (through the use of the debt ceiling bludgeon). Furthermore, the Republicans have already penetrated deep into enemy territory: The Democrats have long ago conceded the necessity to reduce the deficit, including the inevitable need to cut entitlements. As a strategic matter, this concession by Democrats amounts to a recognition that the war is lost. Democrats today are merely fighting tactical skirmishes to achieve better terms of surrender. The Republicans have control of the weapon of mass destruction (debt-ceiling) and it is clear that they will bludgeon the Democrats with it indefinitely over many years until they have extracted every possible concession.
If you are a passive consumer of news media you will probably have been under the impression that an important fiscal milestone was accomplished, that the US narrowly averted default and that the Democratic Party won a major victory over the Republican Party in this latest edition of the Fiscal Wars.
The truth quite different: Nothing was accomplished by the latest agreement, default is a purely imaginary threat, and Republican objectives have been systematically advanced as the GOP continues to strategically route Democrats in the Fiscal Wars.