President Obama and his Democratic allies are shrieking daily that the world is going to come an end if the debt ceiling isn't raised. Why aren't the financial markets singing the same tune? The stock market and, more tellingly, the treasury markets are showing no signs of concern. During the two to three weeks of intense negotiations and the failure of negotiations, the markets have done mostly nothing. The stock market, on balance, is up and the treasury market is pretty much flat. So, where is the panic in financial markets?
Last Saturday, Treasury Secretary Tim Geithner was seen on Fox News hoping against hope that markets would collapse Sunday night if no debt deal was reached. So. No debt deal was reached and the markets yawned. The President, Tim Geithner, Ben Bernanke and the Democratic Congressional leadership are all praying (in the open and before microphones) all day and night that financial markets will show some concern for the phony crisis that they have created. Interestingly, the markets are not accommodating the crisis mongers.
The truth is that none of the plans put forth will have any serious impact on the trajectory of US debt and the markets know that and have known that for some time. Even if no deal is ever reached, there is no reason for financial markets to panic. What's the big deal? There is plenty of tax revenue to pay the interest on the debt, the social security trust fund permits social security payments without raising the debt limit at all, and the government itself has several trillion dollars of treasury holdings in its own hands.
As for the rating agencies, they are already way behind the curve. US debt should have been downgraded long ago. It deserves a downgrade and it will get it no matter what happens in the political arena. The markets have already factored that in. Markets aren't stupid, even if politicians are.
The truth is that August 2nd is largely irrelevant. That's why the markets are yawning.
It is true if Democratic politicians continue to cry wolf, the markets may eventually sag just out of boredom. But, panic? It's not in the cards regardless of the outcome of the current phony crisis.