Once Congress returns from its summer recess this month, it will need to take up the funding of the government past Sept. 30, when the financing of its debt runs out at the end of the fiscal year.
Prolonged government shutdowns have extracted a financial and economic price on the public.
The short window between the start of the congressional calendar and the debt financing deadline carries with it the possibility of another debt ceiling crisis like those in 2011 and 2018.
While the causes of those crises differed, the prolonged shutdowns extracted a financial and economic price on the public. Another politically induced artificial crisis is not in the interest of the economy as it faces uncertainty around the spread of the delta variant.
The debt ceiling is a political artifact that needs to be put to rest. The opportunity will always be there for political actors to create an artificial crisis where there is none. In the past, debt-ceiling showdowns have disrupted financial markets, and when the government shuts down it imposes a hit on overall growth.
The Democrats—who are the majority party in Congress and control the White House—could have avoided all of this by including the debt ceiling in their proposed $3.5 trillion budget reconciliation package. But they have decided not to do this.
So here we are on the cusp of another potential artificial crisis. Where do we stand?
Don’t push it too far: The U.S. Treasury is taking what is referred to as “extraordinary measures” to keep the government functioning. The real drop-dead date on a potential default is around Nov. 2. If federal government spending increases because of the pandemic or spending in the wake of an environmental disaster, that drop-dead date could be moved forward into October.
There is always time for both parties in Congress to agree on a continuing resolution and ample room for compromise like the one that led to the Senate’s recent approval of a national infrastructure package.
But the Democrats do not want to attach a continuing resolution for an increase in the debt ceiling because it would take 60 votes in the Senate to pass and Republicans are on record as not being willing to cooperate. The risk of a government shutdown on Oct. 1 is rising.
Default is not an option: Put simply, default on U.S. debt is not a reality-based policy option and is a nonstarter. Default is a recipe for chaos across global financial markets and would take the economy back to the depths of the financial crisis in 2008. Individual policy actors who speak of default as an option should not be taken seriously.
Learn from the past: The lessons of past debt ceiling crises and government shutdowns should be heeded.
The 2011 debt ceiling crisis caused a decline in the Standard & Poor’s 500 of roughly 17% between July 22 and Aug. 8 along with a spike at the front end of the curve for Treasury bills as investors sought the safe haven of short-term debt even at the risk of taking losses on their principal.
Short-term U.S. debt with coupon payments around the possible October to November deadlines is currently trading modestly cheaper to other notes. This discount implies that the investment community is beginning to price in a possible debt ceiling crisis at a minimum. Should the specter of a default loom large, as it did back in 2011, short-term debt will be trading far cheaper compared to other notes around the potential Nov. 2 drop-dead date.
In the wake of the 2011 crisis, the Conference Board’s Consumer Confidence Index declined by 31% between July and October of that year, while Standard & Poor’s downgraded the credit rating for the first time in the nation’s history.
The most recent shutdown, in 2018, was because of a budget standoff over funding of a proposed border wall. It lasted five weeks and shaved 0.1% of gross domestic product from fourth-quarter growth that year and 0.3% from first-quarter growth in 2019, or about $7 billion per week from the economy.
Now is not the time: Given the risks to the economic outlook linked to the delta variant, this is no time for a politically induced financial and economic event.
What’s more, with the Federal Reserve signaling it intends to begin paring back its $120 billion per month in asset purchases, a fall debt ceiling crisis would almost certainly result in the pushing back of paring operations into next year.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
