Just When You Thought It Was Safe to Go Back in the Water …
Brian Hague, CFA
Our sub-title should be “Spending Authority and Debt Limit Debate, Part … (ah, heck, we don’t know what part of this debate we’re up to).”
Yes, folks, that time is once again approaching, where our feckless leaders in Washington muster, bluster, and perhaps filibuster, casting sound bites and barbs, posturing to no real avail, and ultimately kicking the can a bit further down the road.
After the last such debate – which resulted in a 16-day government shut-down in October – a bicameral budget committee was created to hash out a compromise to avoid the next debacle. That bipartisan (and we use that term with tongue firmly planted in cheek) group was given a December 13 deadline, which is fast approaching, with no progress to date (surprise).
If no compromise is reached, the sequester continues, which conservative lawmakers prefer to a deal that would replace spending cuts with tax cuts. At this juncture, no bright line has been drawn over Obamacare, which was the political football of the last debate – probably because the GOP would prefer that the fiasco of a health care law continue to flop about like a dying carp, rather than seeing it go away and fade into distant memory by 2016.
There’s another deadline of January 15 to fund the government, and a February 7 debt ceiling deadline looms shortly thereafter. If the January 15 deadline is missed, another government shut-down could commence (which, if it’s like the last one, would mean a nice 16-day paid vacation for “non-essential” government employees).
As for the debt ceiling, the CBO estimates that the use of extraordinary measures available to the Treasury could extend the amount of time before the government can’t pay its bills by about a month, and tax revenue in the spring could buy even more time – which, of course, only means that the can bounces a bit further down the road before the next kick. However, the impact of an impasse would be far worse in the spring than it was last October.
The first and most significant reason is that, in October, just 7% of the fiscal year’s coupon payments on Treasury term debt were due, thus the Treasury had the ability to weather the storm with relative ease. But in February 2014, nearly 40% of the fiscal year’s interest payments are due, which will hamper the Treasury’s ability to make payments absent a deal to raise the borrowing limit. That means the market reaction this time around will be far more serious.
The second reason, which is pure speculation on this writer’s part, is that a shut-down could delay tax revenue availability, and reduce spending from tax refunds, if IRS employees are once again included in the “non-essential” category, and are furloughed during the key tax season.
In any event, we appear to be headed once more unto the breach. All the world will be watching as our government’s credibility takes yet another hit, and the final outcome will undoubtedly be … more of the same.
Brian Hague has more than 26 years’ experience in financial institutions and the capital markets. His career has included work as an S&L examiner during the thrift crisis; trading futures for and valuing the mortgage derivatives portfolio of a $16 billion financial institution with offices on Wall Street; advising financial institutions regarding portfolio and risk management; serving as Chief Economist for a $50 billion financial institution; and serving as President/CEO of a national institutional brokerage and investment advisory firm for more than 15 years.
Brian has been a featured columnist and contributor for several trade publications, and has authored daily and weekly economic commentary, as well as two books for institutional investment managers. He has also been a frequent speaker and trainer at regional and national conferences. He holds a BA in Psychology and an MBA from Pittsburg (KS) State University, as well as the CFA charter and numerous FINRA securities licenses.
Copyright Graphic Volker Von Domarus/123RF 2013