In just four days the continuing resolution financing the federal government expires. Two weeks later the nation’s debt ceiling will also need to be raised. If any of this sounds familiar, it should because these political dramas have become almost a yearly occurrence.
Technically, we have already reached the debt ceiling back on May 19. Since then the U.S. Treasury has utilized what they call "extraordinary measures" to remain roughly $25 million below the debt limit of $16,699,421,000,000. I guess the government might find a way to keep paying its debt beyond Oct. 15, but only for another week or so.
As for a government shutdown, the political theater this year has reached new heights. With mere days left before the deadline, Democrats and Republicans have embarrassed themselves by voting on budget bills that both sides know will never see the light of day. So how bad could it get if these two issues are not laid to rest?
Those on Social Security, Medicare, Medicaid, unemployment insurance and food stamps should rest easy. Nothing will happen to those "mandatory spending" programs. Services that required the protection of property and/or human life (air traffic control, prisons, border security, and veteran’s hospitals are examples) would also be spared.
Discretionary spending, however, would be savaged. Things like visa applications, national parks, airport security lines and anything else that involved the services of the hundreds of thousands of furloughed government employees would suffer.
But before you panic, consider a few facts. Since a new budgeting process was established by congress back in 1976, the U.S.government has shut down 17 times. Both Presidents Carter and Reagan each weathered six shutdowns during their administrations with the longest lasting 2.5 weeks. The longest shutdown in our history was during the Clinton Administration. That one lasted three weeks.
At their worse, these shutdowns caused some mild inconvenience but had no lasting effect on the economy, the financial markets or Americans in general. Within a month of their resolution even those most affected found life was back to normal.
A failure to raise the debt ceiling, on the other hand, could prove to be quite dangerous. It would mean that America’s bills would go unpaid. The nation’s debt holders and private service providers would suffer the most. Congress has increased the debt ceiling at least 90 times in the last century and 14 times from 2001-2013 in order to avoid this consequence.
It was only in 2011 that the Republican Party determined that the debt ceiling was fair game in partisan politics. Those threatening a debt showdown today are also hoping that the stock market will panic and interest rates across the board rise sharply (as they have done in the past) when this issue last surfaced two years ago. They are treading on dangerous territory, in my opinion.
There has been only one time in history that the U.S. has defaulted on any of its debt since the 18th century. Investors in U.S. Treasury bills set to mature on April 26, 1979 received notice that the U.S. Treasury would not make its payments on maturing securities to individual investors. The reasons were many: a congressional stand off over increasing the debt limit, an enormous number of small holders of these Treasury bills and a breakdown in the word-processing equipment used to prepare checks.
That temporary default only affected a tiny portion of investors holding a miniscule amount of our debt. The immediate impact was to raise the interest rate on Treasury bills by 60 basis points equal to sixth-tenths of one percent. It was a one-time permanent increase in the cost of borrowing to this nation. It increased interest payments by $12 billion. Imagine the impact of a default on the entire $16 trillion of our debt.
Our "leaders" have no idea what their petty squabbling could do to this country’s future deficits, debt obligations and debt ceiling. Although I believe that both sides are simply using the debt ceiling as a bargaining chip, the ramifications of even a small default would be mind-boggling. The cost to us would easily equal the whole of our present deficit and make the price tag of Obamacare look like chump change in comparison. I only wonder how our politicians failed to see that two years ago and again today.
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.