U.S. Debt Ceiling Debate: What Will Happen – Money Morning

A U.S. debt ceiling debate is once again on Congress’ agenda. Congress has about three weeks to pass a budget, and the White House has said that U.S. President Barack Obama will not negotiate over raising the 2013 debt ceiling provisions.

We’ve seen this script before on debt ceiling deadlines, and with so many other pressing issues. Congress will again kick the can down the road.

Before that, a brewing showdown will again unfold, one with distinct consequences for other forms of legislation and the country.

Republicans will likely display the debt ceiling talks to voice opposition to other parts of the Obama agenda. According to policy experts, 80 GOP members of the House have said they will only support a budget resolution that defunds Obamacare.

With this year’s IRS mishaps, the revelations of the National Security Agency spying program, and Congressional approval hovering at near lows, the debt ceiling is creating a cloud of uncertainty that could leave Washington in complete disarray…

U.S. Debt Ceiling: A Game of Chicken

Congress has raised the debt ceiling – which refers to the amount of money the country can borrow – on 78 occasions since 1960, with 49 increases happening under Republican presidents and 29 under Democratic presidents, according to the U.S. Treasury Department.

The United States hit its $16.7 trillion borrowing ceiling in May 2013; however, Treasury Secretary Jack Lew has used a number of tricks to delay the official date that the government is unable to meet its financial obligations.

That date, which now is arbitrary and somewhat dangerous given so, will hit in mid-October to coincide with the looming Congressional showdown.

That showdown, however, is part of a very crowded political calendar that will likely require some maneuvering on both sides.

Even though Lew and President Obama have vowed not to negotiate, the legislative body has several critical votes on the docket. For example, Congress is expected to debate immigration reform at a time when it was expected to be the sole big-ticket item on the fall schedule.

Now that there are other issues, the debt ceiling debate has more ammo for both sides – and this is contributing to a perfect storm for the markets…

What Would Happen in a Government Shutdown?

Many argue that a government shutdown would immediately lead to a U.S. default on its obligations. It would mark the first time in the U.S. government’s history that it has not paid its debts.

As a result, it would dramatically raise interest rates, require immediate cuts to government budgets, and sack the value of government bonds owned around the world. In addition, the United States would slash or halt government-issued income streams like Social Security, Medicare reimbursements, and military salaries.

“Operating the government with no borrowing authority, and with only the cash on hand on a given day, would place the United States in an unacceptable position,” Jack Lew wrote in a letter to Republican House Speaker John Boehner.

The financial impact is obvious. But additional market factors like Syria and the U.S. Federal Reserve’s desire to taper its $85-billion-a-month bond-purchasing program are creating the markets’ “perfect storm.”

f

Rising interest rates could lead to catastrophic damage as the United States must service higher interest payments. These payments provide no value to the economy and only act as a drain on production and savings.

Moving forward, the economy will likely remain in a holding pattern as Congress focuses on Syria first and investors await a critical announcement by the Fed on tapering its quantitative easing (QE) bond-buying program come Sept. 18.

For more on how the QE taper could affect markets, check out this chart.