On Tuesday, we said that Congress will remain deadlocked until there is a comprehensive debt-reduction deal. The reason is the debt ceiling. The statutory limit on public debt has not gone away. It's the third big speed bump that Congress faces. House Republicans won't vote to raise it without some credible program to rein in deficit spending. Nor do we believe most Democrats will either.
Technically, the government ran out of borrowing authority on Dec. 31, according to Treasury Department calculations, but the Treasury has been able to maintain cash flows by dipping into various trust funds that it manages. But doing so can sustain the government for only about two months, and that time is just about up.
Last week, the Senate voted to join the House in "suspending," not raising, the debt limit, currently set at $16.4 trillion, until May 18. Since this allows the Treasury to replenish its trust fund cash stores in the interim, the debt-ceiling crisis is effectively postponed until mid-July.
Repeat as Needed
Now here is the kicker. Congress is poised to alternate between recurring crises for the rest of the year. First we will be talking about a U.S. government shutdown. Then we will be talking about a U.S. government default. This is what Sen. Ron Wyden (D., Ore.) means when he talks about "rolling" cliffs. Congress can't seem to resolve either problem on a long-term basis. So we will see recurring short-term extensions until something forces Congress to act.
That something is probably going to be the financial markets. The markets are ebullient today, as well they might be, considering the force of a steady but slow recovery and the Federal Reserve's quantitative easing. But this pure ebullience may not last, as the history of past government shutdowns and debt ceiling standoffs suggests that these issues are not resolved without roiling the markets to a significant degree. Yet in this case, an adverse market reaction, such as a sharp selloff in response to the dysfunction in Washington, may be the only way to break the logjam on Capitol Hill.
Indeed, we will go further and say that many politicians in Washington expect the financial markets to come to their rescue by selling off at a point in time when a drop in stock prices could provide both impetus and political cover for making tough decisions. Investors may not relish the role of being simultaneously held hostage by Washington and appealed to as the arbiters of economic policy. But that's what is probably ahead of them. We would advise investors to enjoy the spring, which has started early this year. Summer could be long and hot.
