As the United States stumbles into the second week of a partial government shutdown and politicians take potshots at each other from the trenches they have dug on either side of the aisle, economic Armageddon clocks around the country are ticking away pessimistically. Here’s why: the U.S. hit its $16.7 trillion debt ceiling in May, and the Treasury has said that it will exhaust extraordinary financing measures on October 17.
If Congress fails to act by then, Uncle Sam will wake up on October 18 with $30 billion in his pocket and no authority to borrow. This means the government will have to rely on incoming tax receipts to pay its bills, and what happens next is anybody’s guess.
Defaulting on debt payments would be catastrophic, and there is a possibility that even if the debt ceiling is not increased or suspended, the Treasury would be able to service the nation’s debt with tax receipts — but Treasury Secretary Jack Lew has suggested that the department does not have the logistical capacity to prioritize payments. Even if this were possible, incoming receipts could only fund about two-thirds of current expenditures.
The standing “best” solution to the problem is to simply raise the debt ceiling, and market participants are operating under the assumption that this is what’s going to happen. But brinkmanship is the name of the game in Congress, and increased political drama translates into increased uncertainty for observers.
As much as business leaders and financial market participants would like to simply put on blast goggles and carry on navigating an already tepid recovery, the showdown is impossible to ignore. Not only does the shutdown create an additional fiscal drag on the overall economy — which could very well worm its way into fourth-quarter earnings — but the risk of a default, however remote, is just too big to ignore.
The situation is particularly toxic because it appears that if Congress is left to its own devices, nothing will get done. External pressure is needed. Some of this is pressure coming from the public and is evident in polling data, but John Cassidy, a staff writer for The New Yorker and one of the most astute political and economic commentators roving the media landscape, has a different idea.
“Congress needs adult supervision,” he wrote on Tuesday. “Since the President can’t provide it and the Republican leadership won’t, the market might well have to step in and do the job.”
Cassidy suggests that one way — perhaps the only way — to get Congress off its ass is to present it with a real and present economic disaster, something even more immediately pressing than the debt ceiling. In 2008, he points out, a market crash helped inspire Congress to pass the Troubled Asset Relief Program.
“Today, the situation is less grave than it was in September, 2008, but it’s fundamentally similar,” Cassidy writes. “In order to maintain a functioning government, Congress needs to finance the programs it has enacted. In order to protect the good standing of the United States and underpin the reserve status of the dollar, the Treasury Department needs to be able to raise money that can be used, among other things, to pay the country’s creditors. A bit of bedlam in the markets could help accomplish both of these tasks.”
Major U.S. equity markets have declined since the shutdown began at the start of October, but only modestly — between about 2 percent and 3.5 percent for the Dow, S&P 500, and Nasdaq.
The market isn’t about to self-coordinate a crash in order to motivate Congress, but the idea that a politically induced market crash could in turn inspire political action is still interesting.
Cassidy argues in his piece for The New Yorker that “once the markets started tanking, investors, the banks, and the media would besiege Congress for action. The political environment would change drastically. Refusing to acknowledge reality, including the reality that every country has to pay its creditors or face ruin, would no longer be an option. Within days, or even hours, the two sides would come up with some face-saving device to calm the markets.”
The type of crash necessary to produce substantive political action would be damaging, sure, but perhaps less damaging than a prolonged fight over the debt ceiling.