Upcoming Debt Ceiling Fight Could Get Really Ugly by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 13, 2015
IN THIS ISSUE
1. Treasury Out of Money November 5 Unless Congress Acts
2. This Year’s Debt Ceiling Fight Could Be Really Ugly
3. Is a New Recession Looming Just Around the Corner?
4. US Recession Estimates Hit 14-Month High Last Week
5. NEW SPECIAL REPORT: Seven Risk Factors That Could Drive the Markets Lower
Treasury Out of Money November 5 Unless Congress Acts
Here we go again – another debt ceiling battle will play out between now and November 5 when the Treasury says it will run out of “extraordinary measures” to fund the government without exceeding the current debt limit of just over $18 trillion. If the debt ceiling is not increased, the US government will default on its debt.
We’ve seen this movie numerous times before, and we all know how it will ultimately end. But what happens between now and November 5 is likely to be mind-racking for the markets. To understand what is about to happen, let’s do a quick refresher course on the debt ceiling.
The debt ceiling is a cap set by Congress on how much the federal government may have in outstanding debt. That limit applies to debt owed to public investors and institutions (ie – anyone who owns US Treasuries), plus debt owed to federal government trust funds such as Social Security, Medicare, etc. Congress has always set some kind of limit on national debt, but the first modern version of it was set in 1917. Today the debt ceiling is $18.113 trillion.
Raising the debt ceiling simply lets the Treasury borrow the money it needs to pay all US bills and other legal obligations in-full and on time. Those bills are for services already performed and entitlement benefits already approved by Congress.
So raising the debt ceiling is more like a license to continue paying what the country owes. And the obligations are incurred because of countless decisions made by lawmakers from both parties over the years.
So, how often has Congress raised the debt ceiling? On average, more than once a year. Since 1940, there have been 95 measures enacted to adjust the debt limit in one way or another. So why is there usually a big fight to raise it? I’ll get to that below.
Sometimes lawmakers have raised the debt ceiling by small amounts, and other times by large amounts. Sometimes they’ve raised it “temporarily” with provisions for it to “snap back” to a lower level at some point. And sometimes they’ve “suspended” it when they can’t agree on raising it outright.
A suspension is a wink-and-nod maneuver that basically lets the Treasury temporarily borrow as needed to pay bills without regard to the debt limit. Then, when the suspension ends, the debt limit automatically resets to the old cap plus whatever the Treasury borrowed during the suspension period.
We’re actually in a debt ceiling suspension right now. The debt limit was suspended back in March when we hit the statutory limit. Ever since, the Treasury has used special accounting maneuvers – perfectly legal ones – to keep paying all the country’s bills without breaching the ceiling. But these extraordinary measures will be exhausted on November 5, according to the Treasury.
The next question is whether the debt ceiling fight threatens to shut down the government. The answer is no. Congress recently passed a continuing resolution to fund the government through December 11. However, the debt limit bout could get lumped in with that other fight Congress will be having this month over spending – and the spending battle could result in a government shutdown.
Normally by October 1, the start of Uncle Sam’s 2016 fiscal year, Congress has passed bills that authorize federal spending in order to keep the government open. And to their credit Republicans in the House and Senate did pass the first joint budget resolution since 2009 in early May; however, President Obama roundly criticized it and refused to sign it (pocket veto). So now we are at October 13 and we still don’t have a federal budget for FY2016.
Some Republicans are threatening to make that difficult unless lawmakers defund Planned Parenthood because of a controversy over how the group handles fetal tissue after an abortion. That’s on top of disagreements lawmakers will have over adhering to previously adopted spending caps – known as “sequestration” – but both are topics for another time.
This Year’s Debt Ceiling Fight Could Be Really Ugly
Last week’s scare over a possible government shutdown may have been just the warm-up act for a much bigger threat that could cause the Treasury to default on trillions of dollars of debt. The latest shutdown scare was narrowly averted by a last minute deal in Congress that angered its most conservative members, and some believe prompted House Speaker John Boehner (R-OH) to step down. His presumptive replacement, House Majority Leader Kevin McCarthy (R- CA), abruptly announced Thursday that he would not seek the job for reasons that are still uncertain.
Now, amid the House leadership vacuum, Congress remains paralyzed over a long list of contentious issues, from budget battles to a sweeping new trade deal. But unless Congress acts in the next few weeks to raise the government’s legal borrowing limit, the Treasury will be forced to stop borrowing and paying its bills – potentially including interest on government bonds that have already been sold to investors.
“Congress needs to act or we could be faced with a crisis,” Treasury Secretary Jack Lew said last Thursday at an International Monetary Fund meeting in Lima, Peru. “We have the capacity, but do we have the will?”
Congress came close to forcing a Treasury default in July 2011, pulling back from the brink at the last minute and agreeing to a compromise. The spectacle cost the US its Triple-A credit rating, even though no payments were actually missed. Now, with the House locked in what could be a protracted leadership battle, the prospect of a self-inflicted financial crisis has increased substantially in the last week.
Some default skeptics have argued that such a default is unlikely because the Treasury would still have enough cash coming in to pay interest on the national debt. But the Treasury has said in the past that it has no legal authority to decide which bills to pay and which to postpone. It’s also not clear whether its payment system could be rejiggered to prioritize some payments over others.
Some default deniers also argued the last time around that President Obama has the power to override Congress and authorize the Treasury to continue borrowing, based on language in the 14th Amendment (“The validity of the public debt of the United States … shall not be questioned.”) This argument has long been raised but is always slapped down.
And yes, some have even speculated that the Treasury could use its powers to mint coins to create a $1 trillion cash cushion. Unfortunately, there aren’t enough gold reserves available to mint such coins, even if it were legal.
The bottom line