Another milestone

US debt surges $328 billion in single day, surpassing $17 trillion for first time

Just one day after President Barack Obama signed into law a bipartisan deal to end the government shutdown and avoid default, the US debt surged a record $328 billion, the first day the government was able to borrow money.

RT,

19 October, 2013

Fasten your seatbelt, because the US debt rate is racing out of control and nobody seems to know where or when the spending will end: The US debt now equals $17.075 trillion, according to figures the Treasury Department posted online on Friday.

The one-day increase of $328 billion to the US debt load smashed the previous record of $238 billion set two years ago.

The huge leap toward what some economists fear will be eventual insolvency was blamed on the government replenishing its supply of "extraordinary measures," that is, the federal funds it borrowed from over the last five months in a desperate effort to avoid hitting the debt ceiling.

Under the law, government coffers are refilled once there is “new debt space,” according to a report in The Washington Times.

The Treasury Department was forced under so-called “extraordinary measures” to borrow $400 billion beginning in May, in anticipation of an agreement between Congress and Obama.

“Usually Congress sets a borrowing limit, or debt ceiling, that caps the total amount the government can be in the red,” according to the report. “But under the terms of this week's deal, Congress set a deadline instead of a dollar cap. That means debt will rise by as much as the government spends between now and the Feb. 7 deadline.”

If the rate of spending continues as it has over the last five months, US debt may eventually by as much as $700 billion before it must apply for another increase to the debt ceiling.

Republicans, who came under intense criticism for “holding the government hostage” by demanding an overhaul of Obama’s healthcare legislation, eased off on their unpopular demands without demanding any spending cuts.

On Wednesday, the Democrats and Republicans pushed through last-minute legislation ending a 16-day government shutdown and extending the already high debt ceiling to avert a default that would have had serious global economic repercussions.

Standard & Poor's said on Wednesday that the partial US government shutdown, the first in 17 years, had already trimmed $24bn from the American economy and would reflect poorly on economic data in the fourth quarter.

Political stalemate

Political stalemate continues in Washington

There appears to be little progress in the United States Congress to reopen Government and raise the US debt limit.

Radio NZ,

16 October, 9.36 GMT

Republicans in the House of Representatives have revealed a rival plan to the bi-partisan one being discussed in the Senate.

Both ideas are similar, but House Republicans want to delay various parts of President Barack Obama's healthcare law.

The White House has rejected that proposal, and Democratic Party leader in the House, Nancy Pelosi, accused Republicans of trying to undermine efforts to reach an agreement.

"Why are they doing this to the American people? Sabotaging a good faith bi-partisan effort coming put of the Senate. Wasting the public's time and in this case time is money."

The White House says Mr Obama, will not allow Congress to demand ransom for fulfilling their basic responsibilities to pass a budget and pay the nation's bills.

The United States Federal Reserve has repeatedly warned the impasse could inflict another recession if it triggers a default.

Towards financial Armageddon?

Yesterday there was “optimism”; today there is still no agreement. My bet is on a last minute agreement to “kick the can down the road”

Fitch puts US credit rating under review for downgrade

Global credit rating agency Fitch has put the United States’ ‘AAA’ credit rating on “rating watch negative” based on stalled debt ceiling negotiations.

RT,

15 October, 2013

"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default," Fitch wrote in a release Tuesday afternoon. 

The agency said the US Treasury, though it could still make some obliged payments after October 17, may be exposed to “volatile revenue and expenditure flows” based on the impasse in Washington.

“The US risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens - all of which would damage the perception of US sovereign creditworthiness and the economy,” Fitch wrote.

Halted talks on raising the debt ceiling risk "undermining confidence in the role of the US dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the US,” Fitch went on. “This ‘faith’ is a key reason why the US 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns.” 

"The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy," a US Treasury spokesperson said. 

In August 2011, credit rating agency Standard & Poor’s downgraded the US credit rating from ‘AAA’(outstanding) to ‘AA+’ (excellent) amid a similar stalemate in Washington on raising the debt ceiling. 

Fitch added that the regularity of the US debt-ceiling fights contributes to Tuesday’s move.

“The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the US government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the US economy,” Fitch wrote. 

House Republicans nixed a vote scheduled for Tuesday evening on a plan that would have sought to reopen government agencies and raise the debt ceiling before the US defaults on October 17. 

Sources told Politico the GOP did not have a sufficient number of votes to pass the legislation. 

The cancelled vote follows an earlier House GOP proposal Tuesday that was rejected by the White House. 

President Barack Obama said in a Tuesday interview that he expects a deal on the debt to happen, despite the tight deadline.

"Let's not do a lot of posturing, let's not try to save face, let's not worry about politics,” he told WABC in a note to fellow lawmakers. 

Plan B: Central banks getting ready for financial Armageddon

If the US debt-ceiling debate goes past the eleventh hour, and the default of the world’s largest economy becomes a reality, leading central banks around the world are gearing up to minimize losses and keep the world economy functioning.

 

RT,

15 October, 2013

If US lawmakers don’t reach a budget consensus and raise the debt ceiling by Thursday October 17, the US will become the first Western power to default since Nazi Germany in 1933, and will send markets into uncharted territory.

The rest of the world is bracing itself for what would happen if the bill is rejected, and the US inches closer to defaulting on its debts, which are largely foreign- held in the form of US Treasury Bonds.

Central banks have begun preparing for the worst-case scenario if US does fault, which would result in a serious devaluation of Treasury bonds, delayed payments, and a more large-scale version of the current government shutdown.

“Because in the past it’s always been sorted out is absolutely not a reason to fail to do the contingency planning,” Jon Cunliffe, who will become the Bank of England’s deputy governor for financial stability in November, told UK lawmakers.

“I would expect the Bank of England to be planning for it [US default]. I’d expect private-sector actors to be doing that, and in other countries as well,” said Cunliffe, who acknowledged a default as “the main risk to the [global] financial system”.

The European Central Bank and the People’s Bank of China (PBC) have struck a deal that moves both banks farther from the dollar orbit. The two banks agreed to ‘swap’ $56 billion worth of yuan for $60.8 billion worth of euros.

Many central banks have reserves in the form of Sovereign Wealth Funds, which are also at risk if the US defaults, as many of the assets are held in dollars. These investment vehicles could be crippled by a default. China’s is estimated at more than $1.3 trillion - the world’s largest.

A historic shift

Neil Mackinnon, a former UK Treasury official, told RT the US default tango marks a shift in the global economic paradigm, from West to East.

If the US doesn’t act soon, “the dollar will decline and its importance will move to a multi-polar currency system and other currencies will take on board more importance,” said Mackinnon.

Over the weekend, economic leaders from around the world met in Washington DC at the International Monetary Fund’s annual meeting. The fund’s managing director, Christine LaGarde, issued a harsh warning the global financial system could enter a recession if the US misses its debt deadline.

The US Senate said they will announce a deal to end the shutdown and extend the debt ceiling on Tuesday, which will pass through to the House, where it will face Obama’s hard-nosed Republican opponents who want to cut funding of the Affordable Care Act.

Senate Majority Leader Harry Reid, a Democrat, said Tuesday has the potential to be a “bright day” and bring calm back to the global markets. 

Jim Rogers: US is exceptional...it's largest debt nation in the world!

There may be progress in US over the government shutdown and debt ceiling, but it's not all good. The deal being talked about now wouldn't resolve the crisis - but rather kick the can down the road setting the scene for another budget showdown early next year. For more on this RT talks to investor Jim Rogers, author of 'Street Smarts - Adventures on the Road and in the Markets'.

Losing faith in the American empire

The American monster is going down - let's see if the whole world goes down with it

Losing faith: Global financiers look to de-Americanize

A US debt default could hit on Thursday, and world leaders are second guessing the dominant role America plays in finance. Regardless of the final decision in Washington, confidence and credibility in the US has already eroded.

RT,

14 October, 2013

In an editorial published by the Chinese state-owned press agency Xinhua, a columnist says the US economy has ‘failed’ and put many countries who hold state assets in dollars, at risk. 

“To that end, several corner stones should be laid to underpin a de-Americanized world,” the editorial read. 

Last week China, the biggest US creditor, started to make preparations for a technical default on loans. The European Central Bank and the People’s Bank of China (PBC) have agreed to start supplying each other with their currencies, avoiding the dollar as an intermediary currency. The currency swap agreement will last for three years and provide a maximum of 350 billion Yuan ($56 billion) to the ECB and 45 billion euro ($60.8 billion) to the PBC. 

In a further sign of growing distrust, China introduced a so-called “haircut”, or a discount, on the value of US Treasuries held as collateral against futures trades. 

Developing and developed nations are equally concerned, and institutions like the World Bank and the International Monetary Fund (IMF) have issued several warnings. 

Christine LaGarde, managing director of the IMF told the US they must uphold their financial promises to the international community and raise their debt ceiling. Failing to do so would put the world “at risk of tipping yet again into a recession,” LaGarde said in an interview on NBC’s ‘Meet the Press’, which aired on October 13. 

“You have to honor your signature, … give certainty to the rest of the world,” LaGarde urged the US, a strong supporter of the international lending tool. 

The country that has long provided a sturdy backbone to the global economy is now teetering on a mass default. If US lawmakers don’t forge a solution to raising the debt ceiling by October 17, investors with US treasury bonds, one of the lowest-risk assets, could suffer.  

“It’s not just China that’s at the mercy of US lawmakers, its everybody in the world that is at the mercy of US lawmakers right now,” David Kuo, Investment Advisor, Motley Fool told RT .

“China is trying to diversify away from US Treasuries,” said Kuo, adding investors “cannot just assume an asset is 100 percent safe.” 

China holds nearly $1.3 trillion in Treasuries, Japan has $1.14 trillion, and other big foreign creditors include Caribbean creditors, Brazil, Taiwan, Russia, and European nations. 

Other creditors have decided to keep calm. 

Russia, ranked the 11th on the list of the US top creditors with the estimated $132 billion in US Treasuries, plans to keep their Treasuries. 

"I don't see the need for revising our reserve investment strategy in US Treasuries," Russian Finance Minister Anton Siluanov said at a press conference on October 11 following a meeting of the G20 finance and Central Bank chiefs.

“What’s happening now, I hope, is a fairly short-term situation,” Siluanov told reporters, noting Russia’s investment plan is long-term. 

If the US misses the debt ceiling deadline of October 17 and stops paying their creditors, it would be the first major Western government to do so since Nazi Germany under Hitler in 1933, which wasn’t able to pay their debts following World War I.

The US has a bank holiday today in honor of Columbus Day; however, after making little headway on solving the budget gap, both the Senate and the House will hold sessions on Monday. 

For Republicans, Obamacare has been a major stumbling block in agreeing to raise the debt ceiling, as they see the legislation as antithetical to their ‘small government’ philosophy. 

It might be interesting to hear how conventional, reasonably well-educated New Zealanders see the American situation (Radio NZ, afternoons, 10/14/2013)

Coverage from this morning's Morning Report - Radio NZ

Political shennigans

Senate stalls bi-partisan debt ceiling deal to end government shutdown

With only five days left to a possible default, there is yet no unity in the US senate with Republicans and Democrats rejecting each other’s proposal to end the 12-day-old government shutdown.

RT,

12 October, 2013

On Saturday the focus of efforts to end the shutdown shifted to the Senate, where the two sides held negotiations in a bid to resolve the stalemate. However, the talks yielded no agreement.

The US Senate Republicans rejected a Democratic plan to raise the debt ceiling through 2014 without making any cuts or changes to Obamacare. Voting 53 against and 45 in favor, Republicans, who want the extension to be accompanied by spending cuts, blocked the bill, which needed at least 60 votes to overcome the objections.

The move was followed by Senate Democratic leaders’ opposition to Republican proposal to end the fiscal stalemate.

Rejecting an offer by Sen. Susan Collins, R-Maine, to end the budget impasse, Democrats argued that her offer asks for too much in return for too little, the POLITICO cited senators and aides.

The so-called Collins plan, which has bipartisan support, offered a six-month extension of government funding and an increase in the government's borrowing limit through January. It was also calling for a two-year delay on Obamacare's medical device tax as well requiring income verification for Americans seeking subsidies for President Barack Obama’s Affordable Care Act.

Democrats say a new medical device tax that would raise $30 billion over 10 years for the President's healthcare law.

After discussing the plan with the President Friday, Collins said Obama called the proposal "constructive”, but she, at the same time, did not “want to give the impression that he endorsed it."

Speaking to reporters after the vote, US Senate Democrat leader Harry Reid said he would like negotiations with Republican leaders to result in a deal by Monday. He will meet with President Barack Obama later on Saturday, White House officials said.

The White House said the Senate rejection of the debt plan was unfortunate and urged Congress to find a solution to reopen the government and raise the debt ceiling.

"Congress must do its job and raise the debt limit to pay the bills we have incurred and avoid default," said White House press secretary Jay Carney.

Without action by Congress, the United States could default on its bond payments by Thursday, for the first time in country’s history.

Follow RT's LIVE UPDATES on the US budget crisis

GOP Warns "Definitely A Chance We're Going To Go Past The Deadline"

Zero Hedge,

12 October, 2013

The rhetoric from today's political maneuvering is eerily reminiscent of the rhetoric just a week ago and absolutely in now way represents the 'progress' than an impatient to BTFATH equity market appears confident about. As AP reports, Harry Reid seemed to arrogantly explain "we haven't done anything yet" by way of compromise (as his party rejected the compromise deal on the basis of the spending and taxes issues; and the Republicans came out swinging. Boehner (behind closed doors) exclaimed "The Senate needs to hold tough; the President isn't negotiating with us;" and tea-party caucus member Fleming blasted, "It's very clear to us he does not now, and never had, any intentions of negotiating," and warned, there was "definitely a chance that we're going to go past the deadline."

Via AP,

Republicans and Democrats in Congress lumbered through a day of political maneuvering Saturday while a threatened default by the Treasury crept uncomfortably closer and a partial government shutdown neared the end of its second week.

 

"We haven't done anything yet" by way of compromise, Majority Leader Harry Reid, D-Nev.,

...

Across the Capitol, tea party caucus Republican Rep. John Fleming of Louisiana said there was "definitely a chance that we're going to go past the deadline" that Treasury Secretary Jack Lew has set 

...

"The Senate needs to hold tough," Rep. Greg Walden, R-Ore., quoted Speaker John Boehner, R-Ohio, as telling the GOP rank and file in a private meeting. "The president now isn't negotiating with us." 

...

The president's party rejected a stab at compromise led by GOP Maine Sen. Susan Collins, while Republicans blocked the advance of a no-strings attached measure the Democrats drafted to let the Treasury resume normal borrowing.The party line vote was 53-45, seven short of the 60 required.

 

In disagreement was a pair of issues, both important and also emblematic of a broader, unyielding dispute between the political parties over spending, taxes and deficits.

 ...

"Perhaps he sees this as the best opportunity for him to win the House in 2014," Fleming said of the president. "It's very clear to us he does not now, and never had, any intentions of negotiating."

Reid was savage.

Republicans had begun seeking concessions on health care, he said, and now their No. 1 issue is "to divert attention from the fools they've made of themselves on Obamacare." 

...

In his Saturday address, Obama said, "Politics is a battle of ideas, but you advance those ideas through elections and legislation - not extortion."

Doesn't exactly sound like the "deal is close" bullshit that drove the Dow up 500 points in 36 hours we saw last week?

In the meantime, we wonder what "sweet nothings" these two were discussing in the past...

Wall Street

"The ONLY reason the system is still functioning with all its bad debt and fraud and corruption is that the balls are being juggled and accounts not settled -- Obama and the Congress want to keep the balls in the air so there can be no accounting."

Wall Street Bets a Quadrillion of Everybody Else’s Money

“Even if the whole planet were offered as collateral, it could not cover Wall Street’s bets.”

By Glen Ford

Information Clearing House,

11 October, 2013

October 11, 2013 "Information Clearing House - The clock is ticking, we are told, on the “good faith and credit” of the United States government, which might technically be unable to pay its bills after October 17 if the two corporate parties don’t make a deal on the debt limit. Congressional Republicans and the White House are “playing Russian roulette with the global economy,” says an editorial in the Dallas Morning News, warning of impending “economic Armageddon” as financial markets “crater,” the economy stalls and interest on future federal borrowing skyrockets.

Given that capitalism has entered a terminal stage of acute and escalating crises, the Dallas editorialists may be right; anything could set off another spasm of financial mayhem in a system that is ever more unstable. However, it is the “markets” – a euphemism for the financial capitalist class – that are the ultimate source of instability, the folks who play Russian roulette 24-7 and have dragged humanity to a place where an actual Armageddon is only a twirl of the chamber away. In this game, everybody’s head is in play.

It is proper that the corporate press speak of the impending fiscal threat – a minor one, in the maelstrom of crises that beset the system – in gambling terms. An increase of interest rates by a few basis points (fractions of a percent) on trillions of borrowed dollars amounts to quite a chunk of public money, to be paid directly into the accounts of these very same private “markets” that are supposedly biting their nails with anxiety over the budget. The Dallas Morning News and its fellow corporate propaganda spores spread the myth that the “markets” (bankers, hedge funds, etc.) crave stability, when the vital statistics of the real world of finance capitalism scream the opposite.

The Lords of Capital (the “markets”) are pure gamblers who have transformed the global financial marketplace into a machinery of perpetual uncertainty, in which all the wealth of the world is bet many times over by people who don’t actually own it, in a casino whose operators scheme against each other as well as their patrons, most of whom are not even aware that they are in the game – much less, that it is Russian roulette.

“Derivatives are valued at six times more than the total accumulated wealth of the world.”

The notional value of derivative financial instruments is now estimated at $1.2 quadrillion – that is, one thousand two hundred trillion dollars. This statistic is fantastic in every sense of the word, amounting to 16.7 times the Gross World Product, which is the value of all the goods and services produced per year by every man, woman and child on the planet: $71.83 trillion. Derivatives are valued at six times more than the total accumulated wealth of the world, including all global stock markets, insurance funds, and family wealth: $200 trillion.

The great bulk of known derivative deals are held by banks that are considered too big to be allowed to fail, with the top four banks accounting for more than 90 percent of the exposure: J.P. Morgan Chase, Citibank, Bank of America, and Goldman Sachs.

We are told that derivatives are simply bets between knowledgeable partners – hedges against loss – and that every time one of these financial institutions loses, another gains, so that there is no net loss or threat of global collapse. But that’s a lie. Never in the history of the world has finance capital so dominated the real economy, and only in the past two decades have derivatives been so central to finance capitalism. The players do not know what they are doing, nor do they care. The meltdown of 2008 was caused primarily by derivatives, requiring a bailout in the tens of trillions of dollars that is still ongoing, with the Federal Reserve buying up securities that no one would purchase – that is, bet on – otherwise. Yet, the universe of derivatives deals has grown much larger than in 2008, effectively untouched by President Obama’s so-called financial reforms.

The casino has swallowed the system. The sums the players are betting are not only far larger than the value of the rest of their portfolios, but six times larger than the combined assets of every human institution and family on Earth, and almost 17 times bigger than the worth of humankind’s yearly output. Even if the whole planet were offered as collateral, it could not cover Wall Street’s bets.

“Detroit has been rendered a failed city by the full range of derivatives and securitization.”

The events of 2008 demonstrated that derivatives collapses, like other speculative financial events, behave as cascades of consequences, rather than orderly “resolutions.” Derivatives deals infest or overhang every nook and cranny of the U.S. and other “mature” economies, poisoning pension systems and municipal finance structures. Detroit has been rendered a failed city by the full range of derivatives and securitization. When the casino is the economy, everyone is forced to play, and the poor go broke first.

Reformers of various stripes tell us that derivatives can either be regulated to a less lethal scale or abolished, altogether, while leaving Wall Street otherwise intact. That’s manifestly untrue. Finance capital creates nothing, reproducing itself through the manipulation of money. The derivatives explosion occurred because Wall Street needed a form of “fictitious” capital to continue posting ever higher profits, and ultimately, fictitious portfolios full of tradable bets. Derivatives deals are the ultimate expression of financial capitalism: they are primarily bets on transactions, rather than investments in production. The rise of derivatives signals that capitalism has run its course, and can only do further harm to humanity. The derivatives economy – all $1.2 quadrillion of it – is the last stage of capitalism.

If the Occupy Wall Street movement had understood this, and articulated the necessity to overthrow and abolish Wall Street, its impact would have been far more profound. As it stands, Americans are directed to quake in fear as the clock ticks down to some technical federal budgetary deadline on October 17 – as if that’s the sword of Damocles hanging over the world.

BAR executive editor Glen Ford can be contacted at Glen.Ford@BlackAgendaReport.com. - http://www.blackagendareport.com

Who's boss?

Obama Says Real Boss in Default Showdown Means Bonds Call Shots

By David J. Lynch and Cordell Eddings

Yahoo,

11 October, 2013

President Barack Obama knows who is the boss: the bond market.

"Ultimately, what matters is: What do the people who are buying Treasury bills think?" the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation's debt.

Even with the U.S. budget deficit down by more than half since 2009 as a percentage of the economy, the Congressional Budget Office says the government this fiscal year will need to borrow an average of almost $11 billion each week. That's why Obama is so sensitive to what investors will tolerate.

"The market is the final arbiter of any policy, the ultimate barometer and enforcement mechanism," says Russ Certo, a managing director at Brean Capital LLC in New York. "The market holds risk-takers and policy makers accountable."

After weeks of confidently expecting a resolution of the standoff in Washington over the government shutdown and the debt ceiling, bond investors this week began to betray nervousness in their approach to short-term government borrowing.

The yield they demanded at the Oct. 8 auction of four-week Treasury securities almost tripled from a week earlier, Treasury Secretary Jack Lew highlighted in testimony before the Senate Finance Committee yesterday. The government was forced to pay 0.35 percent for four-week borrowings, up from 0.12 percent.
Endorsing Deal

The White House yesterday endorsed a short debt-limit increase with no policy conditions attached, signaling potential support for a Republican plan that would push off the lapse inU.S. borrowing authority through Nov. 22 rather than Oct. 17. Rates for all Treasury bills maturing through Nov. 14 fell in response, while those with due dates between then and Jan. 2rose. At a meeting with Republican leaders later in the day, Obama neither accepted nor rejected the party's plan. The two sides will continue discussions.

Obama's deference to bond investors is reminiscent of the last Democratic president, Bill Clinton, whose economic agenda in 1993 was eclipsed by demands for deficit reduction. The belt-tightening was followed by four straight budget surpluses later in the decade, prompting Alan Greenspan, the then-Federal Reserve Board chairman, to predict the end of the Treasury market. Bond buyers' clout ebbed.

More than a decade later, surpluses are a fading memory and the bond market has regained its swagger. Yet unlike in the Clinton era when the danger of rising yields kept government spending in check, the market now is exercising discipline only after several years of record federal outlays and borrowing.
‘2008 Event'

"The one market that is behaving more as if a 2008 event is around the corner is the T-bill market -- one must wonder if this is the proverbial canary in the coal mine," David Rosenberg, chief economist at Gluskin Sheff in Toronto, wrote to clients this week.

Investors' sudden awareness of the danger in Washington also can be seen in the difference between what banks pay to borrow from each other and the yield on one-month U.S.government debt. This so-called TED spread turned negative this week for the first time since Bloomberg began collecting such data in 2001, meaning investors regard banks as a better credit risk than the U.S. government.

Jack McIntyre, who oversees $44.5 billion at Brandywine Global Investment Management LLC in Philadelphia, said slow economic growth, low inflation, and accommodating central banks explain why 10-year Treasury yields are little changed from Obama's first month in office, even as federal borrowing has soared.
Discipline Enforced

"Markets can still enforce discipline on policy makers and will if the situation gets way out of hand," McIntyre said.

Senator Michael Bennet, a Colorado Democrat who worked in debt markets as a managing director of Anschutz Investment Co. in Denver, said Obama will be at the mercy of market sentiment that can sour overnight unless he tackles the U.S. long-term debt.

"Things can change, and you don't know when that's going to happen," Bennet said at a Bloomberg News breakfast this week. "It's not in your control. It's somebody else making that decision, saying, ‘I'm not going to buy that paper at that price.'"

Such a loss of investor confidence -- as seen across the periphery of Europe -- would cause borrowing rates to rise for mortgages and other consumer loans as well as government debt.
Tougher Opponents

Presidents from Theodore Roosevelt to John F. Kennedy confronted individual corporations or entire industries.President Harry Truman in 1952 seized the nation's steel mills in a move later ruled unconstitutional by the Supreme Court.

Modern financial markets are tougher opponents. Clinton took office in January 1993 determined to stimulate the economy with fresh spending to create jobs. Instead, his advisers warned that he risked a bond-market meltdown unless he first focused on cutting the deficit, which had reached 4.7 percent of gross domestic product, its highest level in six years.

"You mean to tell me that the success of the program and my re-election hinges on the Federal Reserve and a bunch of f------ bond traders?" Clinton replied, according to "The Agenda," an account of his economic policy-making by journalist Bob Woodward.

After witnessing the bond market's power, James Carville,Clinton's top political operative, quipped: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to comeback as the bond market," he told the Wall Street Journal at the time. "You can intimidate everybody."
‘Strategy Worked'

Under Clinton, the yield on the 30-year Treasury fell to a low of 4.7 percent in October 1998 from a peak of 8.2 percent in November 1994, while the budget deficit turned into a surplus.

"That strategy worked for Clinton," said Rob Shapiro, who helped draft the president's economic plan and is now chairman of the Washington advisory firm Sonecon Inc. "It produced the longest boom on record."

As budget deficits exploded following the 2008 financial crisis, with the government recording its first trillion-dollar shortfalls in history for four years in a row, many Republicans said so-called bond market vigilantes would demand higher Treasury yields. That hasn't happened.

Even amid the prospect of the U.S. defaulting on its debt,yields on the 10-year Treasury notes at 2.68 percent are less than half the 50-year average of about 6.5 percent, according to data compiled by Bloomberg.
Remote Prospect

To many in the market, default remains a remote prospect.William Gross, co-chief investment officer of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, called it "almost impossible."

Washington's repetitive political standoffs have conditioned Wall Street to expect 11th-hour solutions.

With the federal government partially shuttered and the nation sliding toward a possible debt default, some have suggested that, as a way out, Obama could invoke the 14th amendment to the Constitution, which says the public debt "shall not be questioned."

Obama earlier this week ruled that out, as well as any of the other unusual maneuvers that have been suggested -- such as minting a $1 trillion coin. He said investors might balk at buying new Treasuries or demand higher interest rates.

"If you start having a situation in which there's legal controversy about the U.S. Treasury's authority to issue debt, the damage will have been done even if that were constitutional," he said. "Because people wouldn't be sure."
Debt Doubles

The $11.9 trillion market in outstanding Treasury securities has more than doubled since mid-2008, when the government ramped up borrowing amid the financial crisis. Almost half that amount is held by foreign investors; an additional $2trillion is held by the Fed.

The government is on track to borrow $7 trillion more over the next decade, according to the Congressional Budget Office.

As a percentage of the economy, the deficit is expected to bottom out at 2.1 percent in fiscal 2015 before resuming its uphill climb, CBO says. Under current law, debt held by the public would exceed annual output by 2038. The budget office in a recent report said such outsized borrowing would be unsustainable, another reminder of creditors' power.

"The bond market calls the shots," says Robert Reich, a professor of public policy at the University of California at Berkeley who was secretary of Labor under Clinton. "All eyes are on the bond market right now."