While the government shutdown is threatening economic growth, an even bigger crisis is barreling toward the American economy.
It’s likely to hit us on March 1, 2019. And even if the government is reopened by then, we are still looking at a perfect storm of government dysfunction and economic ruin.
Because Congress could not agree on a budget that the president would sign, the partial government shutdown started at midnight on Dec. 22. It’s now the longest shutdown ever, and there’s no end in sight.
Nine executive departments – including 800,000 workers – have been either fully or partially shut down. Essential workers must report to their jobs even though they will not be paid until the shutdown ends. This impacts roughly a quarter of the government’s activities, and its ripple effect is actually threatening economic growth.
Indeed, the Council of Economic Advisers estimated economic growth drops by 0.13% each and every week the government is closed. And the White House chief economist Kevin Hassett even said they are projecting 0% GDP growth during the shutdown.
Securities regulators cannot approve new stock offerings. The Transportation Safety Administration is experiencing increasing sick-outs by employees. Food safety inspectors and even the tax man are all facing tough times. Farmers cannot receive money from their FDA loans on which they depend to make mortgage payments.
Just today, the FAA restricted flights into LaGuardia, one of the busiest airports in the United States, due to air traffic controllers refusing to work without pay.
And that’s just the warm-up act for what’s coming next…
Why the Debt Ceiling Will Be a Much Bigger Crisis
Every few years, Congress ignores its self-imposed spending limits and simply votes to increase them. The debt ceiling – the maximum amount of borrowing allowed by the federal government – is supposed to keep our national indebtedness in check. It’s quite hard to do that if Congress just legislates for more.
Think about this – the total U.S. federal debt is just about to top $22 trillion. That’s trillion with a “t.” And thanks to the interest owed, the higher the debt level gets, the faster it rises. It is simply unsustainable.
Congress keeps spending more and more, creating a crisis where it can’t borrow any more money to pay its bills.
We know the debt is out of control, but Congress also has to pay what it owes, or the United States will suddenly be viewed much like a deadbeat tenant.
Those are the stakes when the debt ceiling comes back in March.
The battle lines are drawn. Either Congress raises it again or just suspends it, as it did last year, or else the government will have to make ends meet with cash on hand. Based on the extreme partisanship now holding Washington in a headlock, the outlook for a deal is not great.
A failure to raise the debt limit (and then rein in spending) could be ruinous to the United States’ credit rating. This is like refusing to pay your credit card bills because you made some irresponsible purchases last month.
That could lead to an even worse economic crisis, as credit ratings agencies are already threatening to downgrade U.S. debt. The last time the idea of a credit downgrade surfaced, Standard & Poor’s was the only major U.S. ratings agency that knocked Uncle Sam’s debt down a notch to AA+ from AAA. It’s still a great score, but it was a black eye for the country.
Both Moody’s and Fitch ratings agencies kept their top ranking, but this year, Fitch already warned of a downgrade if the shutdown continued and a budget was not passed.
This is a very big deal because the level of interest a borrower pays is based on the length of the payback period and the credit score in place. The lower the credit score, the higher the interest rate.
That’s just what we don’t need – more interest payments leading to even more debt.
Should there be no deal for a new debt ceiling, the Treasury department won’t be able to issue new debt to pay the government’s bills, which means it will be limited to monthly inlays to keep the lights on. That includes mandatory spending programs like Medicare and Social Security.
Obviously, that lowers confidence in U.S. creditworthiness, making borrowing more expensive.
There will be a little slack thanks to the large influx of tax receipts in April. But after that, the Treasury will have to work some magic by playing with its cash flow and issuing short-term debt at lower interest rates. But that can only be a stopgap solution. Long-term projects need long-term financing, so this adds to the risk taken by the government.
Even Fitch said that a closed government and lack of a debt ceiling deal could develop into a “more pronounced destabilization of fiscal policymaking.” That is no way to run a country.
The last time we got to such a debt ceiling showdown, the S&P 500 fell 20%, and the U.S. dollar surged higher.
And while Congress might be irresponsible for racking up such a bill and refusing to pay for it, you don’t have to be caught in the crossfire…
How to Survive – and Profit – from the Greatest Economic Crisis in 75 Years
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