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Europe Muddles Through

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Twenty years ago I was working in Germany, staying in the small town of Burghausen on the Austrian border. The cycle of holidays that mark the progress of the daily life of the town festooned red, white and blue as they turned towards “French Week” early in the Bavarian Spring. Buses of people from their sister city of Fumel, France came in and the menus in all the restaurants were replaced with copies in French. Burghausen celebrated the arrival of their guests as a family reunion of sorts.

I asked Herr Miterer, owner of the Hotel Post where I was staying, if this “European Union” was going to be successful. His piercing Teutonic glance betrayed the seriousness before he said a word. “It has to,” he said quietly, “We’ve seen the alternative.” Without moving his eyes he pointed to a picture of on the wall of this beautiful little inn that he and his family ran, taken in 1945. The top floor had been blown off and rubble littered what had become the biergarten.

The earnestness of Miterer comes back to me as the latest round of Greek crisis bubbled through the news this week. We’ve seen the alternative. Yet, somehow, it is never quite enough for Europe, this strange forced marriage that stays together for the kids, for the ideals, and for the sheer obligation of it all.

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Appalling Behavior

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As we continue to slouch towards a default of the US Government, the situation remains appalling. There is no apparent movement and many in Congress don’t seem to take the situation seriously. “I think, personally, it (a default) would bring stability to the world markets,” said Rep. Ted Yoho (R-FL), claiming that it would show that the US is serious about its debt problem. Nothing would change the mind of someone this willfully stupid about how markets work and what US debt (and US Dollars) represent to global markets.

But that’s just one Congressperson from one district, right? No, it’s not that simple. This is appalling behavior all around that threatens America’s economy, prestige, and ultimately our ability to function at all in any kind of organized way. I’d like to make it clear what appalls me, personally, about how this is playing out and why it’s not just a partisan issue.

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Ready to Panic?

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What does it take for international markets to panic?  With the debt ceiling due to be hit in a little more than a week, the short answer is that the “full faith and credit of the United States” is still worth quite a lot.   We’re only starting to see the first signs of a panic as an auction of 1-month TBills sold at a net rate of 0.355%.  If that doesn’t impress you, it’s worth noting that it was one third that a week ago.

Stocks started falling, too, with the DJIA losing just over a percent.

Allright, it’s not much.  Gold isn’t budging above $1330 or so per ounce and benchmark 10yr TBills are still comfy at 2.64%.  These are probably the best standards to watch for signs of panic as the stalemate goes nowhere.

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Endgame?

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What will it take to end the shutdown?  There isn’t much that can be compromised in this situation, given that we have two issues at stake – the Affordable Care Act (aka Obamacare) on one side and the continuing resolution plus the debt ceiling on the other.  There’s just not a lot of give when you have this kind of asymmetry.  So it’s almost certainly going to be one side that caves.

As said before, it’s hard to imagine the President and his supporters in the US Senate giving in, so let’s just call that a low probability event.  It’s probably going to be a Republican give of some kind.  And one is brewing in the form of a general revolt of “pragmatic Republicans” who understand how dangerous this game is.

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