Interview: Joshua McCallum, economist, UBS Global AM

Congress has voted to suspend the debt ceiling until mid-May, buying United States politicians more time to negotiate a deal on government spending.

But the decision to delay extends uncertainty in the US economy, which will hold back business investment, fears Joshua McCallum, senior fixed income economist, UBS Global Asset Management.

“Uncertainty is debilitating,” he says. “What we need is something that provides a bit of business certainty for a while.”

He adds: “It’s hard to see how it’s good for the US economy for [the debt ceiling] to be delayed.”

The debate over the debt ceiling has already unearthed some startling ideas, such as the proposal to mint a “trillion-dollar coin”, or indeed several coins, that would monetise the US debt.

McCallum says this possibility, which arose because of a failure in legislation to cap the value of commemorative coins, would be hugely inflationary and push the value of the dollar “through the floor”.

However, there is another way the Treasury could sidestep the debt ceiling – by arguing it is not legal.

“The constitution requires the US to make good on its debt,” says McCallum. If Congress fails to find a deal and hits the debt ceiling, “the Treasury could argue that now they can issue commemorative coins [of huge value] in order to meet their creditors, because it’s required by the constitution”.

This example reveals a contradiction in the very notion of a debt ceiling, he says.

“If Congress passes a budget, that budget implies a certain amount of borrowing. Congress authorises the borrowing that’s a consequence of their spending. If the government proposes a debt ceiling, they’ve introduced mutually contradictory legislation.

“As far as I can tell, unless they resolve it themselves, the Supreme Court has to decide, and my strong feeling is the Court would go with the constitution over the debt ceiling. In a sense, you pass the budget, you have to face the consequences.”

However, McCallum says this discussion is likely to prove hypothetical – President Obama has said he does intend to challenge the legality of the debt ceiling.

Read more on this subject in the February 2013 issue of Funds Europe.

©2013 funds europe



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