There is emerging evidence that the Treasury Department may have money to pay U.S. obligations beyond an August 2 deadline -- the date on which a default has been expected to occur. Ward McCarthy, an economist at Jefferies & Co, recently said the government has enough money to make normal payments until August 15. The New York Timesputs that deadline at August 10.
Yes, we're only talking about a week or two, but the troubles that the "soft date" creates runs among the debates about the nation's borrowing cap, budget battles, and the timing of potential downgrades of the Aaa rating of the U.S. Assumptions that run from rebalancing of corporate balance sheets to the holdings of money market funds to the timing of the mailing of Social Security funds may all be based on a false premise.
One of the effects of news that the Treasury has money in reserve is that it will empower Congress and the Administration to battle over budget provisions until beyond August 2. The notion that a default will happen on that day has fueled a rush to reach a compromise. Any sign that the government has money to operate another week or more will serve to undermine that urgency.
The suspicion that the U.S. has more money available than is widely thought may have another impact. Analysts cannot understand why there has not been a terrible sell-off in the stock market. Institutional investors may suspect the validity Treasury's August 2 date as well. Why sell shares at low prices during a panic? Better to hold investments for that extra few days the government will not admit it has.
The danger that the financial system faces if it plays chicken with the date on which the federal government defaults is that an incorrect guess could damage the markets horribly as investors stay too long based on an incorrect forecast.