Screw the Deficit

The bond market vigilantes, the group that according to legend forced Washington in the 1990s to turn its attention to reducing the deficit and whose return has been predicted ever since the red ink came back with a vengeance during the George W. Bush administration, will likely make it’s long-anticipated re-appearance in the next few weeks as Wall Street and the budget world turn their attention to the soon-to-be-needed increase in the federal debt ceiling.

Except that the bond market vigilantes are likely to be saying some thing completely different from what deficit hawks have been expecting. Instead of doing what they did before by demanding deficit reductions, today’s bond market vigilantes are far more likely to be insisting that the federal debt ceiling be raised whether or not the spending cuts and revenue increases some are saying is the precondition for their vote ever materialize.

In other words, screw the deficit.

This isn’t surprising: The bond market is the one that stands to lose the most if the debt ceiling isn’t raised as soon as possible after the government’s current borrowing limit is reached in the next few weeks. Traders and investors will have their revenues negatively affected by delays or outright cancellations of Treasury auctions and the rising interest rates that are generally assumed will result if that happens.

Given a choice between delaying a debt ceiling increase until a deficit reduction plan is in place or moving ahead now and dealing with the deficit later, the bond market vigilantes will quickly choose the later. They also are likely to readily agree to a new deficit process that projects reductions in the future rather than actual spending and revenue changes if that’s what it takes to get the debt ceiling increase in place sooner.