Wednesday, October 2, 2013

No deal....

So the 11th hour resolution proved elusive this time.  The cynics amongst us must, as they have many times since the GFC, be again musing on whether the biggest challenge facing many democracies today is democracy itself.

With the failure of the House and the Senate to reach an agreement on a Continuing Resolution (CR), the US Government has moved into its first shutdown in 17 years.  Both sides were actually getting closer.  A House position that started with the defunding of the Affordable Care Act (“Obamacare”) was soon whittled away to a one-year delay and a ban on health-care subsidies for Congressional staff.

The House has appointed a conference committee to negotiate with the Senate, should the Senate wish to participate.  If they go to conference the process is to agree a position which is then returned to both the House and the Senate for a vote.  Assuming it would pass both chambers, it would then go to the President for either his signature or veto.

If the Senate doesn’t agree to go to conference we see a continuation of the recent process whereby both sides continue to whittle away at the gap between the two sides, where it appears to me the only outcome can be a “clean” CR (i.e. with no conditions on the Affordable Care Act) which funds the Government for a period of time, although not for the full fiscal year.  The biggest unknown is how long either of these two routes will take.

Markets are taking this in their stride.  At this point my expectation is the shut-down will be relatively short.  As I said the other day, no one wins out of a shutdown, least of all the Republicans.   A short shut-down means that in terms of economic impact, it should prove to be more of a disruption rather than anything more serious.

However, it must be said that relationships between the House, the Senate and the President appear to be at a low ebb.  That’s a concern because there is a bigger issue on the horizon in the form of the need to raise the debt ceiling by the end of the month.  Failure to act decisively on that issue could have more serious implications.  Watch this space.