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June 30, 2011 12:13 pm
Haven’t we seen this film before? John Boehner has, way back when he was a relatively junior third-term congressman. The Republican Speaker of the House would prefer to skip that particular all-American horror flick.
Mr Boehner has just a month left before his party’s standoff with the White House over America’s $14,300bn debt ceiling limit could undermine the country’s “full faith and credit”. Investors hardly seem worried about a default. Though Treasury yields have ticked up slightly in recent days, that seems to be a reaction to Thursday’s end of quantitative easing and a global reversal of risk aversion.
Why so calm? Investors may be having a flashback to 1995. The story sounds familiar. A stunning Republican midterm election victory the year before has emboldened the new House speaker (Newt Gingrich) to take on the supposed fiscal profligacy of a young first-term Democrat in the White House. The talks go down to the wire, the government starts to shut down and, although disaster is averted, Bill Clinton skilfully portrays the Republicans as reckless. Skipping forward to 1996, Mr Clinton wins re-election in a landslide. Eventually, Mr Gingrich is stripped of his leadership position.
Back to the present. As long as Mr Boehner can outmanoeuvre overzealous tea partiers, he should be savvy enough to avoid making Republican Hubris II. But history is unlikely to repeat itself in another way too. Mr Clinton went on to preside over the first balanced federal budget in decades. That is close to a mathematical impossibility for Barack Obama.
Indeed, a technical default in 2011 would be only a mini-monster in comparison to the fiscal threat. And investors, all too like the unwary citizens in a scary film, seem unprepared to deal with that big beast, which will soon be resistant to all but the heaviest weapons.
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