Debt Ceiling Compromise Is the Opposite of a Cure

Updated from 8:09 a.m. ET Wednesday, Oct. 16, with current information on the compromise.

NEW YORK ( TheStreet) -- Harry Reid, the Senate Majority leader, has made a terrible miscalculation that we're all likely to be paying for both in dollar amounts and in increased personal stress, perhaps for years.

The bill he has negotiated with Republican Senate Leader Mitch McConnell has ended the political stalemate. House Speaker John Boehner encouraged his Republican caucus to accept the measure as a bipartisan compromise, but even so, it took the Democratic caucus to make it happen. It was approved by the House late last night and signed immediately by President Obama.

Sadly, Reid's solution is by its own definition merely a temporary relief that will only bring more and greater pain later. More importantly, his act of compromise further validates the practice of holding the raising of the debt ceiling hostage in a partisan struggle, keeping it as a warhorse in the House stable to be trotted out whenever that body finds itself in opposition to a presidential administration. If history is any indication, any discomfort you feel now will be doubled the next time around.

Granted, the White House and the Democrats got the better deal. The Republicans got only a nod to their demands. But that nod is encouragement enough.

Tensions among the general population began to run high as the deadlock between House Republicans and the White House continued into its second week and they have slowly escalated. The now-imminent debt-ceiling deadline has added urgency, and an air of looming crisis, to the standoff.

The shutdown, by itself, is by now no longer merely a nuisance. Its immediate effect hits the pocketbooks of 800,000 government employees and some uncounted number of vacationers who can't visit the national parks. But its outward ripples have also begun to hit businesses that take in money from those employees and vacationers. It's begun to hit private businesses that supply the government, like Boeing ( BA) and Lockheed Martin ( LMT) and United Technologies ( UTX), all of whom have laid off thousands in the last two weeks. It's hit other airlines, who need government inspectors for their planes. It's begun to hit the stock market, where investors have remained cool on the surface, but have begun quietly investing in funds tied to the CBOE Volatility Index as a hedge against the hour when things go to hell very quickly -- iPath S&P 500 VIX Short-Term Futures ETN ( VXX) has seen a 50% spike in its average daily volume.

The shutdown has directly and indirectly harmed the economic recovery. A recent study by Macroeconomic Advisors estimates fourth-quarter growth this year will be reduced by 0.3% as a result of a two-week shutdown.

More importantly, prior to Wednesday's Capitol Hill deal, in a population still smarting from a long, drawn-out recession, the awareness had been steadily growing of the potential for catastrophe as the U.S. were to fail to meet its debt obligations over a political stalemate, sending both the domestic and global economy into a fresh tailspin. That same Macroeconomic Advisors study speculates that the small economic growth we have been experiencing would stagnate until the end of 2014 in the event of even a brief technical default. It's easy to imagine what that would mean to those currently still unemployed, marginally employed or struggling from paycheck to paycheck.

JPMorgan's ( JPM) Jamie Dimon has said that to default on U.S. debt during the tentative beginnings of a global economic recovery would be to "shoot ourselves in the foot."

Deutsche Bank head Anshu Jain said a default would spread like a "rapidly spreading fatal disease."

The International Monetary Fund's Christine Lagarde said, "If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over."

The world's leading financial institutions were reluctantly making contingency plans against the reality of a U.S. default, even as their chiefs refuse to accept that as a possible outcome. European Central Bank President Mario Draghi said recently, "It's unthinkable that an agreement won't be found" to avoid a U.S. default.

Unthinkable. Unfortunately it is thinkable, some people are thinking it and many, many others are feeling the effects of that uncertainty.

Rep. Tim Huelskamp (R., Kansas) said on CNN's "Outfront" with Erin Burnett Tuesday night, prior to the passage of the Capitol Hill compromise on Wednesday, that he was willing to pass the Oct. 17 deadline imposed by the Treasury -- the point at which the U.S. will hit the debt limit and enter technical default -- in order to gain the concession of significant cuts in future spending.

"It's time for us to get our act together and move forward on facing the fundamental problem of spending too much money," he said.

Huelskamp, like others, says that the Treasury would have the ability to go on paying its bills for a couple of weeks past the point where it can't borrow money any more. Meanwhile, financial blogger Felix Salmon on Reuters offered that we were already in default, since we were not paying our obligations to salaried workers and contractors.

An Ill Wind

Compare the current mood to the usual stress of a presidential election. In a presidential election, most voters have the sense that even if their candidate doesn't win, the world isn't going to end. Each of us will adapt to the new administration's policies and move forward as best we can.

The D.C. standoff was far worse. Even now, it remains difficult to even see what damage a different outcome might have wrought or even when the crisis regarding a potential default might be really over.

As if to demonstrate the stress everyone feels, a popular House stenographer had a meltdown in the chamber Wednesday night. What she said hardly matters. She reached a breaking point at the climax of the House drama. The tension in the air pushed her over the edge.

And the deal doesn't resolve that tension. Given that the current deal sets new deadlines early next year, what we have is merely a delay in the inevitable ideological clash that has staked the debt ceiling as its battlefield.

What happened in this case was that the House Republicans chose a non-legislative approach to refight a battle they lost during Obama's first term. They were prepared to hold 800,000 U.S. government employees and the debt ceiling -- America's standing in the world and its place as the leader of the global economy -- hostage until their demands were met.

Mind you, the debt ceiling has been the subject of negotiations before, and has been used effectively by Democrats as a platform for protest against administration policies. Far from offering comfort, however, that history merely guarantees that future debt ceiling fights will get worse.

Meanwhile, the stress up to now is starting to take its toll on the little guy, evidenced by both facts and anecdotes.

On the anecdotal side: I take the ferry to Wall Street from New Jersey's Sandy Hook. It's an expensive, hourlong commute and on board each morning are a bunch of folks engaged in the nuts and bolts of Wall Street finance for a living. Normally the mood on these rides is calm, absurdly polite and cordial. Everyone is friendly, there's a club-like camaraderie.

But on two occasions roughly a week apart, I saw arguments between riders flare up that almost came to blows, both times as they were waiting to get on the boat. The arguments were entirely trivial -- one was a disagreement over a place in line; the other was even less substantial.

On the highways in New Jersey, we've noticed an increase in driver aggression, road rage, tailgating, honking. In one incident, my wife's car was hit by a truck in a slow-motion accident as its driver angrily tried to force his way in front of her in a traffic jam, unwilling to wait his turn. Again, the motive is silly; the anger, not.

People are tense.

That tension is causing us to second-guess normal spending habits. Consumer confidence fell more during the first week of October than during any time since the Lehman Bros. collapse in 2008. That eroding confidence goes both ways. One editor from another outlet sent out a tweet asking if people were seeing an increase in restaurants refusing to take credit cards, insisting on cash.

Those who were already out of work are seeing their efforts for finding employment further hampered and are taking desperate measures. Sales of body-produced items, like hair, breast milk and organs, have been rising dramatically for the last couple years, according to a Bloomberg report. The number of egg donors has risen 13% since last year, with 65% of them claiming a financial motivation.

A slowdown in mortgage closings is getting worse the longer the shutdown continues. Social Security payments are being processed but delivery is being delayed. The furloughing of employees from safety and support positions in many agencies -- the Food and Drug Administration, the Centers for Disease Control and Prevention, the National Transportation Safety Board, the National Highway Traffic Safety Administration, the Environmental Protection Agency, The Federal Emergency Management Agency to name a few -- has left those employees without a paycheck and the remaining employees and those who are trying to use those services under heightened stress.

On the other hand, liquor store sales have shot up over 10% on the year after hovering around increases of 4% or less for the last five years, easily the brightest spot in the retail landscape.

People are tense, seeking an outlet. And it's going to get worse. Reid's negotiations with Republicans, accepting conditions -- any conditions -- for raising the debt ceiling, guarantee that no matter how the immediate crisis resolves, the acrimony and the political stalemate in Washington will only worsen, making life tougher for the rest of us.

The Nuclear Option

Had the Democrats stood their ground and not compromised, that would probably have been better, in the long run. House Republicans took this course because they thought they could win political advantage. It was a bullying tactic. The best way to defeat a bully is to not give in to his demands.

Assuming the Republican House was finally forced to capitulate under pressure from popular displeasure, a default might serve to finally end the use of the debt ceiling as a hostage to settle ideological scores. Perhaps a new House could someday even vote to eliminate the need to raise the debt ceiling.

A real end to the recurring debt ceiling nightmare is, to my mind, the only favorable outcome. Maybe not worth a tradeoff for a U.S. or a global recession, but it might bring a return to political normalcy and some much-needed psychological relief for the country.

-- Written by Carlton Wilkinson in Asbury Park

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