Photo: ElvertBarnes on flickr
Megan McArdle had a great post yesterday on the great disconnect between Wall Street and Washington when it comes to everything, but especially the debt ceiling fight right now.Here’s a great example of that from Citi’s FX strategist Steve Englander talking about the impact of the Moody’s warning on the negotiations:
What Moody’s seems to be saying is that if there is any kind of default the US will bee downgraded, not by much, but by a little. If they avoid default but do not have a credible deficit reduction program in place, the US should keep its AAA rating but may be put on negative credit watch. That reassessment would take many months to complete. For USD, the initial response is likely to be negative, but limited. In effect, the US government is being invited to raise the debt ceiling and put forward a fiscal reform program. This probably makes it more likely that some agreement is reached because even a small downgrade will raise borrowing costs. We believe that the most likely scenario is that the Moody’s statement provides motivation for a more serious push to a political compromise and USD selling on this factor may unwind.
Rationally, sure, any borrower who was faced with an increase in borrowing costs would get a deal done.
But there’s just zero evidence that anyone is thinking rationally about anything except about how best to be re-elected, a topic on which everyone in Washington is hyper-rational. Unfortunately, rationality at that level doesn’t add up to rationality at the top level, and so this kind of analysis is almost completely divorced from reality about how this debt ceiling fight is going down.