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Archive for October, 2013

The Debt Ceiling Is a National Security Threat

October 16th, 2013

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The debt ceiling is a threat to America’s national security.

If the debt ceiling isn’t increased, national security focused departments and agencies – and all of their employees – may not receive the money they need to keep defending the nation. This historic and potentially catastrophic default on U.S. national security will undermine the U.S. military, all national security-related federal workers and national security contractors.

Absent a political breakthrough in this needless standoff over the debt limit, before the end of the month the Treasury will enter a cash flow crisis, where we won’t have enough money to pay all of our bills.

Some Republicans claim the Treasury could prioritize payments, which could keep national security funds flowing. But doing so may be illegal and logistically impossible.

Treasury has indicated that the “least harmful option” in this disastrous scenario would be a so-called “delayed payment regime.” As the Treasury further noted, “no payments would be made until they could all be made on a day-by-day basis.” This would mean all payments to the military, national security agencies and national security contractors will be delayed until the Treasury had enough cash on hand to pay an entire day’s obligations, allowing the backlog of payments to grow in the interim.

American policymakers are all too aware of the consequences to our national security if the bills aren’t paid on time. “If we don’t increase the debt ceiling, the impact on our military will be unprecedented,” Rep. Madeleine Bordallo, the ranking Democrat on the House Armed Service Subcommittee on Personnel, explained at a hearing on October 10.

And events are going to get even worse.

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A Preview of the 2013-14 Supreme Court Docket

October 8th, 2013

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ICYMI The Supreme Court has started its 2013-14 term. Cases decided in the lower courts can be appealed to the Supreme Court through a process known as petitioning for certiorari (cert), and a vote of 4 justices is required to hear the case. Once a case has been granted cert, oral arguments will be heard between October-December or January-April followed by a vote of all 9 justices—and majority rules. Though the Court’s docket for this term is not yet full, the calendar is already packed with important cases we know or expect will be heard. Below, I offer a brief description of some of the cases you’ll want to keep your eye on. Read the rest of this entry »

The Danger in Shutting Down National Security

October 7th, 2013

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The nation awoke Tuesday to find much of the federal government closed for business. The Republican-controlled House of Representatives had refused to fund essential government functions until the rest of Congress and President Barack Obama agreed to reverse a healthcare law passed three years ago and deemed constitutional by the Supreme Court. By doing so, they put reversing healthcare reform ahead of protecting the nation.

Hundreds of thousands of national security professionals are now on furlough. The latest Office of Management and Budget guidance notes no function has been discontinued that would “imminently threaten the safety of human life or the protection of property.” The Defense Department made clear that “military personnel would continue in normal duty status.”

But even furloughing “non-essential personnel” undermines U.S. security. It hits three critical areas: the Defense Department’s civilian employees, the intelligence community and the agencies that respond to health emergencies.

As of October 1 at 12:01 a.m., hundreds of thousands of national security personnel that are not on duty, including as many as 400,000 Defense Department civilian personnel were told not to come to work. According to the Pentagon’s own guidance, this includes all intelligence activities not in direct support of excepted activities — like the conflict in Afghanistan.

Across the intelligence community more broadly, 70 percent of all employees are now forced to stay home in the government shutdown. The Central Intelligence Agency has 12,500 fewer personnel. We might now miss critical intelligence related to the chemical weapons in Syria or Iran’s efforts to further develop a nuclear weapons program.

The Treasury Department office that identifies terrorist financing networks and sanctions-evaders also sent home its analysts.

Some employees that respond to crisis are also not at work. This includes employees of agencies like the Centers for Disease Control and Prevention, which has shut down its disease monitoring and hotlines leading to “a significantly reduced capacity to respond to outbreak investigations.”

The Food and Drug Administration has stopped its flu vaccination program right at the beginning of flu season — though the virus kills on average over 20,000 people each year. The FDA will also halt all food safety inspections, reducing their ability to prevent salmonella outbreaks. Because of closures like these, the Congressional Research Service wrote, “the nation’s ability to respond to an incident could be delayed. Such a situation could result in increased risk to the nation.”

Some Tea Party Republicans say that a government shutdown is fine because only “non-essential” personnel are affected. But non-essential includes hundreds of thousands of people who work to keep this nation safe and stop crises long before they happen.

A terrorist plot or a disease outbreak will certainly result in a need for medical care — which the Tea Party wants to make more difficult to access. Ironically then, shutting down the government because of the healthcare law is a direct threat to the health of Americans.

This is reckless, shortsighted behavior unbefitting of a great legislature and a great country. If an unforeseen tragedy occurs because of the shutdown we — Republicans, Democrats and independents — all lose.

This piece was originally published via Reuters.

Have the Dominoes of Default Started to Tumble in the Markets?

October 3rd, 2013

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How are markets reacting to the threat of default?

Treasury Secretary Lew has stated that the U.S. government will run out of cash on October 17th. In the market, the dominoes are already starting to tip and a “Congressional Default Risk Premium” has started. This means that investors are demanding greater compensation to hold U.S. government debt that matures after October 17th.

How do you spot the default risk premium?

On Tuesday, government bond trader Ed Bradford (@fullcarry) tweeted that the yields of U.S. T-bills maturing around the October 17th drop-dead-default-date were “blowing out,” that is market-speak for rising sharply. T-bills are Treasury bonds with short maturities, no more than 1 year.

A chart prepared by Bank of America Merrill Lynch analysts shows very-short-term Treasury bills are trading at sharply higher yields—an indication of real default fear in the market. 

BofA Global Research, Bloomberg, Business Insider

What is happening today?

Today, yields are even higher. Compare today’s .04% yield on the T-bill maturing on 10/10/13 with the yields on the T-Bills maturing 10/17/13, 10/24/13, 10/31/13—during the default risk zone. Yields on the debt maturing during the assumed default period are sharply higher—at least double the yield of the debt maturing on 10/10/13. And rising bond yields signal increased risk.

  • T-bill maturing 10/17/13 is yielding .10%
  • T-bill maturing 10/24/13 is yielding .12%
  • T-bill maturing 10/31/13 is yielding .135%

Who owns T-bills? How will they be harmed if the U.S. defaults?

Businesses use T-bills to manage their cash. Normally, businesses don’t sit on excess cash. If payroll is due in a month, a corporate treasurer may invest cash in a T-bill that matures in month. When the T-bill matures the company gets cash to meet its payroll obligations (plus a little interest).

But, what if when the T-bill matures the payment is delayed because the statutory debt limit has not been raised? Then you have problems because the business may be unable to meet their obligations—like paying employees and suppliers. This increased risk is displayed by today’s oddly shaped yield curve.

What’s a yield curve?

The Treasury yield curve plots interest rates for bonds against different time horizons—from very short-term to 30 years. Normally, investors will accept lower yields on short-term debt. But to hold debt maturing in the default-risk-period the market is demanding greater compensation—the congressional default premium.

This is evident if you compare the very short-term section of Tuesday’s yield curve with the yield curve that existed just a month ago. The first dominoes are starting to tip.

Business Insider/Matthew Boesler, data from Bloomberg

The bottom line is this: investors are preparing for the unthinkable—a U.S. debt default.

The Peril of Credential Creep in Foreign Policy

October 3rd, 2013

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In the late 10th century A.D., China’s Song dynasty expanded its civil service exams to select the best and the brightest to be the future bureaucrats of the expanding Chinese Empire. These examinations were rigorous and arcane, less concerned with management and more with Confucian metaphysics. Success catapulted a student into the ranks of the successful elite – but failure provoked an existential crisis, or even suicide. Contemporary observers were appalled by the fierce competition. “A healthy society cannot come about when people study not for the purpose of gaining wisdom and knowledge but for the purpose of becoming government officials,” a Song-era Chinese philosopher wrote.  Read the rest of this entry »

Shutdown: A fight with no room for compromise

October 2nd, 2013

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To end the government shutdown, all Speaker John Boehner (R-Ohio) needs to do is let the House of Representatives vote on a budget. It would pass within 30 minutes. Virtually all 200 House Democrats would vote to keep the government open, as would as many as 50 Republicans. An easy majority.

But no. Boehner and other Republican leaders refuse to do that because they are in thrall to Tea Party conservatives.

Hard-line conservatives number about 50 out of 232 House Republicans. But those conservatives are threatening to lead an insurrection against party leaders if they dare to allow a vote. Other Republican members are terrified that they will face a tough primary challenge from the right if they don’t go along with the Tea Party.

So what have we got? Minority government. It’s outrageous when you think about it.

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