Monday, February 27, 2012

U.S. Debt Ceiling Scenarios - When Will The Ceiling Be Hit and Which Party Will Control Congress

The U.S. government is rapidly spending its way toward the debt ceiling. Treasury Secretary Tim Geithner recently told lawmakers that he expects the debt limit to be reached "quite late in the year." The United States will likely hit the $16.4 trillion debt ceiling between late November 2012 and early January 2013.

The Treasury Department can employ a variety of accounting maneuvers to push back the deadline prior to  the U.S. defaulting on its debt. It did so last year, when the debt limit was technically reached in May but Treasury was able to push back the deadline until early August. Thus, it seems unlikely that the debt ceiling debate will have to be broached by Congress until after the November election.

Regardless of what scenario plays out, the solution will be messy. The credit rating of the U.S. is in danger of being slashed again. Here are a couple of critical considerations:
1) Will Congress and the Presidency be unified under one party or remain split between the Democrats and Republicans?
2) Will raising the debt ceiling fall to a lame duck Congress and/or President to vote upon after the November elections but before the winners actually take their seats in January?
If the Democrats take control of all three branches of Federal government, raising the debt ceiling will probably be noisy, particularly if there is a Republican attempt at a filibuster, but should pass fairly easily. If Republicans take control of all three branches, it may take considerable arm twisting to round up the votes to pass the debt ceiling. however, it seems unlikely that they would force a Federal government shutdown by not passing an increase. As pointed out by Norm Ornstein, of the American Enterprise Institute, if President Obama loses the election, he may still have a strong hand to play in the debt ceiling negotiations, since the newly elected Republican President will not want his first task in office to be rounding up votes for a debt ceiling increase.

The most likely outcome seems to be that the U.S. will continue to have a divided Federal government after the 2012 elections. The seems little cause for optimism that the 2012 Congress will be any better at achieving compromises than the current Congress. The debt ceiling debate is likely to be just as contentious as it was last summer, however, the Republicans may not be amenable to any sort of compromise after the failure of the Super Committee to achieve an amenable solution to reducing the deficit.  

If voters send another divided government to D.C. in the 2012 elections, the potential for a bitter stalemate over legislation to raise the debt ceiling may be in the cards. A shutdown of the Federal government seems like an outcome with a reasonably high probability of occurring. Federal employees should probably be prepared for skipped paychecks and investors should probably be prepared for stock and bond prices to take a hit from a continuation of dysfunctional U.S. government.

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