Even without the Treasury empowered to borrow, plenty of cash will still be coming in, plenty of assets exist that can be liquidated. John Silvia of Wells Fargo told Bloomberg TV that a partial government shutdown (which still isn't a default) might not be needed for at least two weeks beyond the artificial Aug. 2 deadline set by the Obama administration in the wholly artificial debt-ceiling crisis.
But now we have a new problem. The rating agencies, especially Standard & Poor's, have decided to join the politicians in turning an artificial crisis into a real one. S&P says it plans a U.S. debt downgrade, regardless of any debt-ceiling outcome, unless it sees a "credible" plan to reduce future deficits by $4 trillion over the next 10 years.
This has become the real worry for Wall Street, but why? America's spending debate does not remotely make it any more of a default threat than it was a week or month or year ago. America's IOUs are still completely acceptable to the markets.
Even in the long term, the threat is not to bondholders. The threat is to Americans under 50 who think they can rely on Social Security and Medicare. The threat is to countries that hope the U.S. will fight their wars for them. The threat is to K Street bandits trying to live off federal handouts.
But the debt to bondholders will be the last to be dishonored—not least because, unlike a lot of claimants, bondholders can be satisfied with inflation-ravaged dollars.
For the unwarranted power granted to rating agencies, which after all merely issue opinions, blame U.S. law and regulation. These require bankers, pension funds and other regulated investment funds not just to consult ratings, but to act on them.