PIMCO Chief Operating Officer Douglas Hodge on Wednesday kicked off the Morningstar ETF Conference in Chicago with a speech on “the great American saver,” but everybody in the audience seemed more interested in questioning him about the U.S. government shutdown.
The Morningstar event, which is focused solely on exchange-traded funds and is now in its fourth year at a top capacity of 550 attendees, serves as a good bellwether for market participants’ worries about politicking in Washington over the shutdown as well as the looming U.S. debt ceiling deadline.
After his reasoned presentation about aging populations worldwide and how the ETF is a “remarkable” financial vehicle that has democratized the individual investor’s quest to cover retirement costs, Hodge opened the floor to questions and was hit by queries not about ETFs but about the potential effects of a shutdown and debt default.
First up was a questioner who asked how the government shutdown might negatively affect the debt ceiling, which Hodge took as an opportunity to distinguish between the two events. He was less worried about a brief shutdown, saying it would hurt fourth-quarter GDP at a rate of only 0.2 percentage points per week.
But the separate issue of the debt ceiling troubled Hodge more. “Come next week, we’ll be talking about the debt ceiling,” Hodge said. “Default risk is unthinkable. The risk is not so much about Treasury bonds, it’s about ripple effects in repo markets and global capital markets.”
The U.S. Treasury will do everything in its power to avoid default, Hodge said. Rather than default, he noted, Treasury can roll over all the debt and bonds that are coming due, and the revenue it gets from taxes would cover debt service.
Treasury has set a debt ceiling deadline of Oct. 17, and Hodge hopes that lawmakers’ political maneuvering will be finished by then.
“We hope by Oct. 17 it will be resolved, but it may go a week or two or more beyond it,” he said. “Every interest payment and principal payment would be honored, so we would not go into a technical default. Our view is that choice is rather clear. The catastrophic events would be so large that they will choose [to resolve the crisis] rather than go the other way.”
From there, the Q&A moved on to questions about Social Security, the Treasury’s responsibility to global central banks and U.S. credit ratings.
“Boy, you’re a tough crowd,” Hodge quipped before launching into a comment on how the government’s accounting office balances tax revenues and debt repayment. Overall, he said, the government shutdown merely determines “who goes to work and who stays home” while the greater debate is over what the U.S. government should ultimately pay for as it continues to honor its commitments to repay its debts.
“Debt that the government has already underwritten will have to be recycled,” Hodge said. “Then important decisions will be made on how to spend tax revenues. I suppose Social Security and armed forces are some of the immutable things we have as a contract with the government. Doing away with Social Security is not politically acceptable in Congress, and I don’t believe the president would agree with it, either.”
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