The Real Issue and the Next Deadline

As we enter the third week of the current federal government partial shutdown, we feel it is critically important to remind our clients & friends to stay focused on the real issue at hand. You may recall that a few weeks ago it was made perfectly clear that the shutdown would not be resolved until the debt ceiling was addressed – the two problems will be handled together.

This week we are nearing the October 17th deadline for the debt ceiling to be raised in order to avoid a full shutdown and the risk of bills no longer being paid on time, if at all. Most of us are probably not surprised by the fact that we are this close to a series level of dysfunction and we still have no clear path to a compromise in Washington… Politicians have a bad habit of delaying their desire to negotiate seriously until the last possible second.

With that reality framed around the real issue at hand and a looming deadline this week, what are some possible outcomes? We see two:

1. Congress reaches some short-term partial solution that temporarily raised the debt ceiling so they can punt the issue of running the government with a balanced budget. Many will call this “kicking the can down the road.”  This is the most likely outcome as it has become the “go-to solution” for far too many real problems in our country with Washington in gridlock. If this happens, Congress would get the U.S. fiscal fiasco out of the limelight thru the end of the year, but let’s be clear – it will not be enough to eliminate the possibility of U.S. default in the future.  In fact, this solution would mean it is all but certain that this crisis will reappear quite soon.
2. We blow through the October 17th deadline with no deal and the Treasury is faced with the reality of prioritizing who gets paid and who doesn’t.  This is a sobering proposition and will be downright scary to many, especially those depending on social security payments due to be sent November 1st. This will also stress out those due interest payments from Uncle Sam that are due on November 15th.  If Congress let’s this happen there are really only two options for avoiding somebody not getting paid:

• The Treasury simply goes on borrowing and increases our debt to pay the bills.  This would mean that the debt would exceed the current debt ceiling as the Treasury could plead the 14th amendment which states that “…the validity of the public debt of the United States… shall not be questioned.”
• Obama could go around Congress and raise the debt ceiling by executive order, again invoking the 14th amendment as the Chief Executive.

If we go down the road of Option 2 and either of the scenarios that would follow happen we would face legal nightmares, and the proceedings would likely drag on for years. It would, however, prevent the Federal default, which is critical. The hope at that point would be that the crisis is resolved by finally getting our spending within the boundaries of our revenues before any judgment was reached.

So that’s where we sit today. All of us can see that the kind of leadership required for serious, long-term structural reforms to fix the budget and deficit problems just isn’t in Washington today. We expect to see the short-term solution (Option 1) as the “band-aid” that we’ve all come to expect from our current Executive & Legislative leaders in Washington. Will the clock actually strike 12 with no resolution this time? Maybe… and if it does, expect to start hearing a lot about the 14th amendment.

Categorized in: Blog

This post was written by Conscient Capital