Policy, U.S.

Will 2014 See a Replay of the Debt Ceiling Fiasco?

October 22nd, 2013 | By Nick Sargen

Highlights

In a pattern that has become all too familiar, the two political parties were able to reach a last minute agreement to reopen the government until January 15 while extending the debt ceiling until February 7. While markets rallied on the news that a technical default on Treasury debt would be averted, most people were left wondering if there will be a repeat of this month's saga early next year. That possibility certainly exists, as Senator Ted Cruz and other Tea Party members have made it clear defunding ObamaCare remains their top legislative priority.

Nonetheless, I suspect there will be less brinksmanship in 2014 for the following reasons:

  • The leadership of the Republican Party will not risk further reputational damage in an election year. While the deadline for the debt ceiling has been extended to February 7, the U.S. Government can undertake "extraordinary measures" to stay within the debt ceiling guidelines that could tide the government over into the second quarter. With the Congressional campaign season underway by then, most Congressmen would view it as a poor time for a showdown.
  • While expectations are low, the Congressional caucus to reconcile budget documents passed by the House and Senate this year creates a forum to negotiate differences. The leaders of the caucus – Representative Paul Ryan from the Republicans and Senator Patty Murray from the Democrats – have indicated they will seek out areas where there is common ground. In a recent WSJ article entitled "Here's How We Can End This Stalemate" (October 8, 2013), for example, Congressman Ryan indicated the Republicans would consider trading sequestration for entitlement reforms:

"If Mr. Obama decides to talk, he'll find that we actually agree on some things. For example, most of us agree that gradual, structural reforms are better than sudden, arbitrary cuts…We could provide relief from the discretionary spending levels in the Budget Control Act in exchange for structural reforms in entitlement programs."

To be clear, this does not mean a so-called "Grand Bargain" that would combine entitlement reform with tax reform is attainable. The reason: President Obama insists on raising additional tax revenue, which is unacceptable to the Republicans. But there are some areas where a compromise can be reached.

Meanwhile, market participants are re-focusing attention away from Washington and back to the prospects for the economy and monetary policy. The government shutdown is unlikely to result in lasting damage to the economy, but the Federal Reserve will probably refrain from tapering quantitative easing until it gets a clearer read on the economy. This should continue to underpin equities and other risk assets for the balance of this year.