Article by Annie Lowrey.
On July 6, 2011, a faint buzzing from your bedside table awakes you at 3 a.m. You ignore it. At 3:02, your Blackberry still vibrating, your iPhone, which you use for personal email and calls, starts in with the same high-frequency drone. At 3:03, your home phone starts ringing.
You’re a principal at a small, New York-based financial firm. The sudden cacophony means the worst has happened. In mid-May, the United States hit the debt ceiling: Because Congress failed to increase the debt limit, the Treasury Department could no longer issue new bonds to finance the United States’ deficit spending and to pay the interest on its existing debt. For a few weeks, Treasury and the White House were able to move money from one pocket to another to keep the country running smoothly. But the congressional bickering never abated, with Republicans insisting on the passage of huge, immediate spending cuts and a balanced budget amendment, and Democrats refusing to consider either—and certainly not to tie them to the debate over the $14.3 trillion ceiling.
Uncertainty hit the bond market, though not as hard as some expected: For a few weeks and for the most part, investors shrugged it off. But as the intransigence got worse and investors became more spooked, they started selling off Treasury bonds. Financial firms also quietly started converting investments into cash, seeking the absolute and unconditional safety that only dollars provide. The stock market slumped.
Weeks into the impasse, some Social Security payments stopped going out, causing American citizens to scream bloody murder. They barely noticed when, just before midnight on July 5, Treasury said it would start missing scheduled coupon payments on some bonds. Wall Street didn’t miss the announcement, though—hence your 3 a.m. wakeup call. The United States, to the shock and horror of investors around the world, sat on the brink of default. The world’s safest investment became the world’s most uncertain, tipping the markets into chaos.
You dash into your office and arrive by 5 a.m., finding a whole lot more than the Tokyo traders hanging out. Dozens of panicked associates are already there, flipping the TVs from CNBC and Bloomberg to C-SPAN and CNN. Analysts are reading The Hill and Politico, trying to figure out where the congressional negotiations, which lasted all night and have dragged on for months, now sit. You take a look at some of your company’s positions, and reaffirm to yourself that you are in good shape, at least on paper: solidly profitable, light on crummy assets, and carrying a considerable cushion of cash and some foreign currencies. But you receive the first of a few bad calls at 6 a.m.
Foreign investors are spooked, and they’re dumping Treasury bonds—billions of dollars’ worth. They had been selling them off for weeks, of course, possessing much less stomach for the idiocy of the U.S. political system than you and your fellow Americans. But now, investors in Asia and Europe are practically using tractors and pitchforks to move the bonds onto the markets. You and your fellow principals meet: Will the bond market finally force Congress to act? Will this sell-off prove temporary? Should you buy what everyone else is terrified of? Should you all be worrying about hunkering down and battening the hatches and hoarding cigarettes for the barter economy?