Debt ceiling plays phantom to U.S. political soap opera

Commentary: Nation on fast track to be the next Italy

We interrupt this political soap opera for a brief message from reality.

The Treasury bond market is doing fine, the 10-year a new 2011 low, 2.85 percent. How could this be so, news media and officials chanting, "Default, default, DEFAULT …"?

Treasury bonds are doing fine because the United States will not default on them. The Treasury has quietly assured investors that interest will be paid on time, maturing debt paid by issuing new bonds under the limit. The cash required to do so is relatively trivial, perhaps $25 billion in August versus tax revenue near $170 billion.

However, short-term markets are stressed. If this soap opera falls apart altogether, tax revenue will fall short of other August spending commitments by $130 billion or so, which we otherwise would have maintained by borrowing. In August alone. Furloughing half the government for even a week or two would guarantee a new recession.

The Treasury market is fine for another reason: Europe is falling apart (again), their latest grand fix lasting less than a week. Spanish and Italian long-term bond yields are rising back to pre-crisis levels, both nations too big to save. Italy’s debt is 120 percent of GDP, and at about 100 percent any country crosses the black hole threshold.