Geopolitics

September Will Be The Most Politically Unstable Month Of This Year

This month will be busy for us macro monitors.

The FOMC meets September 19–20 and will likely hike rates another notch, launch its balance-sheet-reduction plan, or both. I will be very surprised if they don’t do either.


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Federal Reserve Jeffery Lacker
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The greater suspense is elsewhere in Washington.

Congress returns from its summer vacation recess after Labor Day and has a lot on its plate. Two deadlines are potentially perilous.

The federal government will hit its statutory debt ceiling on September 29. Unless Congress acts, the Treasury will have no authority to borrow money after that date, a conundrum which could lead to the US government’s not paying its bills—including the principal and interest due on Treasury debt—on time.

We went all through this headache in 2011, prompting S&P to cut the US’s credit rating, and again in 2013. The debt-ceiling debate is a rather silly argument, in my view, because it doesn’t reduce spending and actually costs taxpayers money by making the Treasury pay slightly higher rates on its near-term borrowing.

Yet some in Congress want to use the debate as leverage to get their priorities passed. Holding the full faith and credit of the US hostage to a political debate over the debt ceiling is a dangerous game, and I hope they don’t play it.

On top of that, September 30 is the end of the fiscal year, and there is presently no budget for FY 2018. If Congress doesn’t pass one, or if they do pass one and the president vetoes it, the government has to stop operating on October 1.

A shutdown actually happened in 2013, and the government was offline for 16 days before an agreement was reached. In reality, however, much of the government stays open. Law enforcement, the armed forces, and other “essential” departments continue operating, even without a budget.

Closing down the government doesn’t net savings, either, since Congress ends up paying the furloughed “nonessential” workers for the time they aren’t working.

This time around we have another complication, too: President Trump’s border wall. He said at his Phoenix rally last month, “If we have to close down the government, we’re building that wall.” It’s not clear whether a budget that funds the wall can pass Congress; nor is it clear whether Trump will veto a bill that doesn’t fund the wall.

On top of all that, the Federal Aviation Administration and the Children’s Health Insurance Program both need reauthorization this month, and now there’s likely to be a Harvey disaster relief bill, too. All those matters will eat up legislative time and energy.

Time spent on them is time Congress won’t spend on what should be its top priorities: tax reform, health care, and an infrastructure stimulus program.

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