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Climbing Through the Debt Ceiling

By Fisher Investments

NEW YORK (TheStreet) -- Oct. 17: That's the day the Treasury Department expects to exhaust the "extraordinary measures" used to pay the bills since the debt ceiling reset in May.

Unless Congress can raise the borrowing limit before then, the Treasury will have only cash on hand to meet its obligations, leaving everyone from your next-door neighbor to the Secretary of the Treasury himself freaked over a potential default. Scary stuff! What's a stock investor to do?

Breathe. This isn't any different from the 107 other times we've hit -- and ultimately raised -- the debt ceiling. The Senate and House might play hardball over issues like the Affordable Care Act, but whether just before or sometime after the deadline they'll lift the borrowing limit. The 2014 midterms are just too powerful an incentive not to.

But politicians being politicians, we could very well go days or more without being able to issue new debt. So what happens then?

In short, we don't default -- no matter what headlines and politicians say. For one, cash on hand isn't finite. Treasury expects incoming revenue of about $30 billion daily, which is plenty to meet the most important obligations -- namely interest payments. Officials will have to prioritize some payments over others, but handing IOUs to pensions and contractors isn't default.

Default only means missing sovereign debt obligations, either interest payments or maturing bonds. Daily cash more than covers both. Interest payments are only 9% of total tax revenue -- $220 billion annually, more than manageable on $30 billion a day. We can easily roll over maturing debt. Yes, you read that right -- the debt limit doesn't prevent us from replacing bonds. That's zero sum. We just can't increase the total amount borrowed. Big difference.

If this weren't true -- if default risk were legitimate -- markets would tell us. Treasury yields would skyrocket as investors demanded higher compensation for higher risk. But the opposite has happened: 10-year yields peaked a hair below 3% on Sept. 5. As we type, they're down to 2.64% (according to Bloomberg Finance, as of Sept. 26). Sovereign yields just don't fall 30-plus basis points in 20 days if default risk is rising.