The Mattress Futures Index: Is the US really going to default on its debt?

Sharp investors rely on several key indicators to help judge activity on Wall Street and the health of the economy. They may study the price to earnings ratio or study the dividend yield. Economists probe home sales or retail sales numbers for clues.

Is there a barometer to gauge whether the U.S. will collide with the debt ceiling in early June?

Not really. But perhaps the "Mattress Futures Index" would be a good place to start.

In other words, one could check out the Mattress Futures Index to see if people invested in lots of mattresses to determine the chances of a federal default. If people suspect there’s a good chance of a default, then they may stow their cash under a mattress rather than keep it in the bank. Thus, they’d stock up on mattresses. So, the Mattress Futures Index (MFI?) is higher. If the MFI is lower, just keep your money in a conventional savings account. 

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We jest. 

Kind of. 

And for the record, the Mattress Futures Index is not a real thing.

But should people really get concerned about a potential default in early June?

There are two factors working against President Biden and Congress right now. 

Time is an enemy. Mr. Biden huddles with the top four bicameral Congressional leaders on Tuesday. But it would be a challenge to muscle through an agreement by the deadline – even if they forged an agreement at the White House conclave.

The other issue: the math. Why? Because it’s always about the math on Capitol Hill. Congress has dealt with debt ceiling deadlines before. But it’s rare to attempt to tackle the debt ceiling in a political environment this calcified with a divided Congress and ultra-slim vote margins in both bodies.

The last real crisis over the debt ceiling gripped Capitol Hill during the summer of 2011. "Tea party" House Republicans had just flipped the House in the 2010 midterms, capturing an astonishing 63 seats. The tea party’s goal was to slash spending. Many Republicans won because they campaigned so aggressively against former President Obama. Those GOP members abhorred Mr. Obama. In fact, many arch-conservatives in the House didn’t even want former House Speaker John Boehner, R-Ohio, to negotiate with the former President. And Boehner had to keep his distance from President Obama, too – lest conservatives suspect the Speaker was too chummy with the President.

Things are different this time around. President Biden says he won’t negotiate on the debt ceiling. So all Republicans have done for weeks is rail against Mr. Biden for not negotiating with House Speaker Kevin McCarthy, R-Calif.

Moreover, some Republicans are skeptical of a possible default in early June.

"I think they manipulate the dates. I don’t believe it’s June 1. I think it’s more like sometime in August," said Sen. John Kennedy, R-La. "This June 1 date – I think that’s a political statement. Not a statement based on fact."

The Treasury Department forecast months ago that the U.S. could rendezvous with the debt ceiling deadline sometime over the summer. But two things unfolded: federal receipts from the spring tax season are down. Secondly, the much-maligned Internal Revenue Service is now more efficient at processing returns. So, the Treasury can more quickly project the date when the nation could run out of cash.

Sen. Chris Coons, D-Del., said it was "dangerous" for his colleagues to doubt Yellen’s veracity on the debt limit.

"We should trust them. That’s their job," said Coons.

There are even national security concerns about the U.S. hitting the debt ceiling. 

Senate Armed Services Committee Chairman Jack Reed, D-R.I., posed those very questions to Director of National Intelligence Avril Haines at a recent hearing. 

"It would create global uncertainty about the value of the U.S. dollar and U.S. institutions and leadership, leading to volatility in currency and financial markets and commodity markets that are prices in dollars," testified Haines. 

The thing to watch for in the next few weeks are signals from the markets. 

The markets haven’t publicly reacted in a negative way which would get those on Capitol Hill to take notice. But examine some factors behind the scenes. Look at something called "credit default swaps." This is a mechanism investors use to "insure" their bet on government bonds. The cost of that "insurance" is now pricey. That implies that confidence in Treasuries aren’t what they should be. 

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U.S. treasuries are historically some of the most solid, low-risk investments on the planet. But if it’s suddenly costing more – a lot more – to insure your bet that you’ll get your money back from the U.S. government….

Also, the Treasury just auctioned one-month bills which will ripen in early June. The yield on those bills skyrocketed to the highest level in history. The reason? Investors wanted a higher on their bills since there’s a chance government could default. Any contortions in what investors call the "Treasury yield curve" are usually foreboding economic signs.

"We shouldn't wait until markets get scared, rating agencies downgrade us. All of these things will make our own economy worse and our fiscal situation overall worse," said Maya MacGuineas of the Committee for a Responsible Budget.

But at least one lawmaker isn’t too concerned about negative market reactions.

"Markets are very emotional," said Sen. Kevin Cramer, R-N.D. "They respond to every geopolitical sneeze and passing of gas that happens anywhere. And so I tend to not worry a lot about how the market responds because they always recover."

Lawmakers are trying to find out what Treasury does if the government does default.

"I'd like to hear Janet Yellen tell us what the priorities would be. How would you prioritize spending if all you had for a day or week or month, or several months is the revenue that's coming in?" said Cramer.

Here’s what is believed could happen:

Those of us in media often try to equate complex financial and economic situations to everyday "bread and butter" circumstances for average Americans. We talk about "credits cards" and "loans," much the same way someone addresses finances at home. Some of those analogies are on the mark. Many are way off base.

But with the debt ceiling, the credit card parallels are accurate.

The Treasury is constantly bringing in money and shoving it out the door to cover various debts. Standard paychecks for government workers. Filling up various retirement funds for federal workers. Sending out Social Security checks. Paying contractors. 

But if the government rams into the debt ceiling, the Treasury no longer has that "line" of credit to foot its bills. So, Fox is told the government would likely do what most people do at home when they hit a borrowing limit on their credit card: they pay the interest which is due. It’s believed that the federal government would pay that interest on the debt first.

"It will prioritize interest and principal payments so that it's not strictly defaulting on securities, on Treasury securities, which would roil financial markets," said Wendy Edelberg, the former chief economist at the Congressional Budget Office (CBO) and now a senior fellow in economic studies at the Brookings Institution. "Then there are millions of people who are owed federal benefits, such as Social Security payments. We are talking about millions of people potentially not getting paid on a timely basis. So that would certainly affect people's pocketbooks."

Naturally Americans would argue that the Treasury should pay them first, rather than someone else cutting in line.

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"We have to pay our former debts," said Cramer. "So the first thing I think that has to be taken care of is how do we deal with the interest on the debt? In other words, can we service our debt if we can't borrow any more?" 

Some Republican lawmakers tinkered with the idea of passing a bill mandating the order that Treasury pays its bills if there’s a default. But Congress – so far – can’t even pass a bill to address the debt ceiling. So that’s problematic.

"We don't want Treasury picking and choosing which payments should be made on a timely basis and which shouldn't. We don't want Treasury choosing which agencies should get funded on some particular day, or which program beneficiaries should get their checks on some given day. That's up to Congress," said Edelberg.

Edelberg suggested that unions or groups of people could then take the federal government to court to challenge who was getting paid or receiving benefits – or why they weren’t

"The legality of all of this really is very uncertain," said Edelberg. "My guess is that the legal challenges come right away."

All of this could spark sharp stock market declines and jumping interest rates as access to credit grows tighter.

But, we don’t really know. Expectations will mount after Tuesday’s meeting with the President and top Congressional leaders.

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Right now, only one thing is certain: uncertainty.

We can talk about credit default swaps and distorted bond yield curves. But one thing to watch soon could be the "Mattress Futures Index." And if Congress doesn’t react quickly, one could argue that mattress futures may be a good place to invest.