What Are They Thinking? The Debt Ceiling Debate.

Few (if any) decisions are made in DC without a real deadline.  The debt ceiling is no different.  After dueling speeches between Obama and Boehner which offered no new insights and weeks of fruitless negotiation, we are left asking what will motivate Congress to act.  Charlie Cook of the National Journal’s Off to the Races column, offers some sound insight.  As a CMC side note, Charlie’s top editor is Jennifer Duffy – some of you may remember her from our 2011 Annual Meeting.

It is increasingly looking like it may take a cataclysmic drop in the financial markets, perhaps triggered by the lowering of the bond rating for the U.S. government, to focus minds on both sides of the aisle long enough to get this debt-ceiling deal done.  It’s unfortunate that the Dow Jones industrial average might have to fall 500 or 1,000 points before many in Congress are willing to even soften their intransigence.  Both sides will have to go along with what many in their bases consider heretical.

So far, investors have handled the ups and downs of the debate with enormous patience, obviously convinced that cooler heads will eventually prevail.  But how close to a meltdown does Washington have to go before investors really start to worry that the conventional wisdom is wrong?

After the House initially voted down the Troubled Asset Relief Program on September 29, 2008, the stock market immediately dropped 777 points—a 7 percent plunge.  Shortly thereafter, the House and Senate passed the bill and President Bush signed it into law.  Perhaps that’s what it will take here.  But the pain of such a market drop would be enormous.  The years of additional work for those hoping to retire, the body blow to the economy, and the likely rise in unemployment resulting from a severely shaken financial system are all unnecessary, yet they look increasingly likely.

Is the dollar showing the initial signs of what is to come?

A bit closer to home, CME raises margins on Treasuries.

If political outcomes are the drivers, it is tough to see who wins this battle.

Christine M. Cochran

President, Commodity Markets Council

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