“The market is getting used to Washington politics, and the market is getting cynical about Washington politics”
The Goldman Sachs research team noted in a recent memo that “markets and the public may have now become accustomed to brinksmanship in Washington. The next debate on the debt limit will be the fifth ‘showdown’ on fiscal policy in the last two years, and in each of the prior debates policymakers ended up resolving their differences as expected, albeit at the last minute.”
Now, Washington is girding for a new round of fiscal turmoil. The U.S. reached its borrowing limit at the end of 2012, and Treasury Secretary Tim Geithner says his department’s “extraordinary measures” can only keep the bills paid until around the end of February.
Thus far, investors are again keeping calm — even with Obama insisting he won’t negotiate over the debt ceiling and House Speaker John Boehner demanding steep spending cuts in exchange for any raise.
But many analysts fear that investors’ newfound tranquility is lulling Washington and Wall Street into a false sense of security.
“The biggest risk here is that Congress will look at the nonreaction in the stock market and believe it will be OK if they go over the debt ceiling,” said Ed Mills, a financial policy analyst at FBR Capital Markets. “A lot of this is a game of chicken, and it works until it doesn’t.”