Thursday, October 10, 2013

The Washington impasse continues....

The fiscal impasse in Washington continues and signs of an imminent resolution are not good, so further angst and market volatility appears likely in the days ahead.  However, at the risk of appearing overly sanguine, I’m confident a solution will be found.  While I was initially of the view the Budget and the debt ceiling would be dealt with separately, as time is running out a joint solution to both now needs to be found.

Estimates are the shut-down is costing the US economy around 0.1% of GDP a week, but this will be made up once the shutdown ends and government spending catches up.  Lawmakers have already agreed to currently furloughed workers receiving back pay.

Of course the need to raise the debt ceiling is the more critical issue.  The US Government is expected to reach the current $US16.7 trillion debt ceiling on October 17th and effectively run out of available cash to pay the bills, including social security and Medicare, by the end of October.  That means that if the debt ceiling is not raised, the Government will need to quickly bring its spending back into line with revenue.  Given the US is currently running a budget deficit of close to 4% of GDP that would necessitate a sharp and immediate drop in Government spending.  And in order to avoid default, the Government would also have to prioritise debt interest payments, requiring deeper cuts elsewhere.

But I don’t think it gets to that.  I said last week that no-one wins from a US Government shut-down, but everybody loses in a failure to raise the debt ceiling and an eventual US default.  Both sides are aware of the consequences of default and House Speaker John Boehner is on record as saying he won’t allow that to happen.

That just leaves the how and the when.  As we saw with the fiscal cliff negotiations at the end of last year, the closer we get to the deadline the more the pressure grows for a resolution, on both sides of the debate.  The Republicans are wearing most of the blame for the shut-down and would also for any failure to raise the debt ceiling.  And the President doesn’t want to go down in history as the first to preside over a US debt default.

A last minute solution will likely be found.  Speculation is it will involve some form of tax reform, perhaps a concession on a small part of “Obamacare” (the medical devices tax has been mentioned) and perhaps some longer term initiatives to address growth in entitlements.  Whatever the answer ends up being, they’re not there yet.  Watch this space.