US Government Shutdown_Will the US default?

Many people around the world have been fretting about the US government shut down and the sequential debt ceiling. The US reached its $16.7 trillion debt limit in May and since then the country’s Treasury has resorted to accounting gimmicks to remain in business. However, the day of reckoning is 17 October when these ‘extraordinary measures’ reach their sell-by date.

The biggest fear is the possibility of a US default. Considering what has happened over the past few years, I’m not despondent at all. This is not the first time we have come very close to the precipice. In 2011, Congress reached an eleventh hour deal to increase the limit after many long hours of arm twisting and filibustering. This was not without a price, though, with credit rating agency S&P dutifully downgrading US debt from its AAA rating.

In 2012, there were fiscal cliff talks where the Republicans demanded deep spending cuts in exchange for some tax increases, the so-called sequester. In both cases, the Democrats blinked, and that seemed to embolden the Republicans (GOP). No-one is willing to flinch an inch this time, with the 2014 mid-term elections around the corner. The Democrats want to cut the GOP’s majority in the Congress from the current 32 seats advantage. The GOP, however, think that seven Senate seats are within their reach, enabling them to control both houses.

The two sides have drawn a line in the sand for now, which they have said they will not cross unless the other side offers serious concessions. President Obama claims that he’ll not be drawn into negotiations with the Republicans unless they reverse the government shutdown and raise the debt limit. Remember, President Obama is fresh from a humiliating defeat on a major foreign policy issue, where he folded like a cheap suit before the Russian president after setting himself deadlines about attacking Syria.

The US debt talks have given him an opportunity to salvage his image and to prove that he’s not the GOP’s doormat. He’s portraying his party as pro-poor, offering affordable care to some 50 million Americans who can barely afford quality health care. At the same time, he’s positioning the GOP as an elite club that’s detached from the plight of ordinary folks.

The Republicans have also tried to energise their Tea Party base by portraying themselves as fiscal hawks who will not let the Democrats abuse the US national credit card, which is already hopelessly overdrawn.

It’s worth mentioning that if Congress has not cobbled a deal come 17 October, Obama can use his executive powers to override the Congress by invoking the 14th Amendment, Section 4 of the US constitution, to avert default. Another option is to prioritize payments, where the Treasury lives within its means by matching obligations that fall due with corresponding receipts, and push other obligations forward into the future. That can work in the short term, but will surely spark a bond market vigilante backlash when the backlog of future payments is increasing. What if traditional creditors China, Japan and Saudi Arabia start trimming their holdings of US treasuries?

After listening to mudslinging between the two parties, one can notice that at the heart of the problem is the Affordable Care Act (ACA) or Obamacare. John Boehner, the House Speaker, has unequivocally stressed that there will be no debt ceiling deal without rescinding Obamacare.

You may be wondering: How is the debt deal related to Obamacare? Didn’t the ACA pass through both the House and the Senate and wasn’t it signed into law by President Obama in 2010. In addition, wasn’t its constitutionality confirmed by the US Supreme Court? Wasn’t President Obama re-elected in 2012 after beating the Republican hopeful, Mitt Romney, where the ACA was a hot election debate? Why all the trouble now, when this legislation has to be rolled out at the beginning of 2014?

The truth is that the debt ceiling debate has nothing to do with the debt ceiling or fiscal rectitude, but everything to do political arm-twisting, backroom manipulation and bully-boy antics. Unfortunately, this is how business is done in Washington. Stay tuned, there will be a deal at the end of the day. Besides, the US debt ceiling is a moving target. Over the past 70 years, it has been raised some 80 times. In the meantime, let’s sit back with popcorn and Coke and enjoy the politicians’ dramatics.