Debt Ceiling Crisis 2017: Profound Consequences If No Solution Found Lombardi Letter 2017-09-07 02:13:33 debt ceiling crisis 2017U.S. debt ceiling crisishow much is the U.S. debt ceiling in 2017could U.S. see another debt crisis in 2017debt ceiling 2017rising U.S.national debtcurrent U.S. debt ceilingdebt ceiling historydebt ceiling by year The debt ceiling crisis 2017 is forcing Uncle Sam to dig deep into its reserve funds just to stay solvent, and there's barely a peep from the media. Many assumes that the U.S. debt ceiling crisis will blow over, but what if it doesn't? News,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/05/Debt-Ceiling-Crisis-150x150.jpg

Debt Ceiling Crisis 2017: Profound Consequences If No Solution Found

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Debt Ceiling Crisis

Failure to Solve Debt Ceiling Crisis 2017 Could Leave Americans in Dire Straits

The most important news in the United States that nobody is paying attention to is the debt ceiling crisis 2017. The situation is forcing Uncle Sam to dig deep into its reserve funds just to stay solvent, and there’s barely a peep from the mainstream media. Almost everyone assumes that the U.S. debt ceiling crisis will blow over, and that life will continue on as before. But what if it doesn’t? What if there are factors which may prevent a last-minute resolution, as witnessed during the last crisis, in autumn 2015? It’s not as crazy as it sounds.

How much is the U.S. debt ceiling in 2017 and what’s it all about? As it stands currently, the U.S. is operating under a debt ceiling suspension. Prior to the previous debt ceiling agreement, which expired on March 15, 2017, government spending was officially “capped” at $18.113 trillion. This was courtesy of a last-ditch effort that Barack Obama struck with Congress to avert a crisis in autumn 2015. On March 16, however, the previous debt ceiling expired, and aggregate debt reset to account for all issuance since autumn 2015. The national debt total now officially stands at approximately $19.8 trillion, up a whopping $1,414,397,000,000 during that time.

Technically, the U.S. government is operating under what is known as “extraordinary measures” provisions, which are accounting maneuvers that the government can use to temporarily keep the debt under the “limit.” The government is still paying its bills through three funds operated by the Treasury Department: 1) the savings plan for federal employees (also known as the G Fund); 2) the Exchange Stabilization Fund, and 3) the Civil Service Retirement and Disability Fund. The problem is, these three funds are supposed to be earmarked for things like pensions and savings for federal workers. The U.S. government is essentially stealing from the cookie jar to pay off liabilities elsewhere.

Will those funds still be there for federal workers when they are needed? Will the government replenish the funds that it depleted if the crisis blows over? Either way, this is one way that the crisis is affecting ordinary Americans, mainly federal workers, in the here and now.

Thanks to these ancillary cash reserves, the government has enough cash to operate normally until November 2017 or so. But the Trump administration will become anxious to get a deal done. Perhaps the lack of angst in the media is the result of the administration’s 43-member advantage in the House of Representatives and five-member advantage in the Senate. On paper, a deal should get done as long as everyone votes along party lines. But, as we’ve already witnessed, real life and what’s supposed to happen on paper are two different things.

We’ve already seen the GOP’s American Health Care Act (AHCA) plan to repeal Obamacare fail miserably in Congress. They couldn’t even cobble together a final vote despite their 43-member advantage in the House. Furthermore, the debt ceiling crisis 2017 is likely to be just as contentious, if not more, than repealing Obamacare was. It will face stiff resistance from individual deficit hawks like Rand Paul and Mike Lee, as well as Republican coalition groups like the Tea Party and the Freedom Caucus, which have already shown a willingness to buck the party line. Averting the debt ceiling crisis 2017 is no slam dunk, and this should worry every American with a pulse.

Consider, as well, the mind-blowing amounts being proposed. The Senate is currently working on Concurrent Resolution 3, which is a resolution setting forth the congressional budget for fiscal year 2017 and setting forth the appropriate budgetary levels for fiscal years 2018 through 2026. The “recommended levels” of the amounts of debt that the government can bear are listed in the below chart.

Proposed Debt Ceiling Levels

 Year  Total Amount in ($USD)
 2017  $582,574,000,000
 2018  $541,560,000,000
 2019  $673,600,000,000
 2020  $728,659,000,000
 2021  $785,164,000,000
 2022  $897,085,000,000
 2023  $892,854,000,000
 2024  $863,233,000,000
 2025  $946,057,000,000

(Source: “Congressional Record, Vol. 163, No. 7,”  Congress.Gov, January 11, 2017)

If enacted, this would balloon the federal deficit to almost $30.0 trillion in the next decade. This does not curtail the breakneck pace of deficit spending since 2007, but probably undershoots because it doesn’t account for huge stimulus spending sure to transpire during the next economic calamity (such as the U.S. housing bubble of 2008). We can only imagine how much higher above $30.0 trillion the U.S. debt will be if it experiences yet another protracted economic crisis or two.

U.S. Debt Ceiling by Year (Since 2000)

 Fiscal Year  Debt Limit   U.S. Debt, Actual ($ Billion)
 2000  $5,950  $5,591.6
 2001  $5,950  $5,732.8
 2002  $6,400  $6,161.4
 2003  $7,384  $6,737.6
 2004  $7,384  $7,333.4
 2005  $8,184  $7,871.0
 2006  $8,965  $8,420.3
 2007  $9,815  $8,921.3
 2008  $10,615  $9,960.0
 2009  $12,104  $11,853.4
 2010  $14,294  $13,510.8
 2011  $15,194  $14,746.6
 2012  $16,394  $16,027.0
 2013  $16,699  $16,699.4
 2014  *  $17,781.1
 2015  $18,113  $18,113.0

(Source: “The Debt Limit: History and Recent Increases,” Congressional Research Service, November 2, 2015.)

The most ironic part is that the proposed spending increase of nearly $10.0 trillion is emanating from the party of “fiscal responsibility.” These were the same characters throwing fits when the U.S. credit rating was downgraded in large part to excessive debt spending. Senate Republicans refused to raise the debt ceiling unless every dollar raised was offset by corresponding spending cuts. It’s clear that rising U.S. national debt is out of control, as the debt ceiling history shows. So, where are these voices of opposition now?

Apparently, these voices have yet to emerge, but don’t count them out just yet. Just as the Freedom Caucus stonewalled the AHCA in Congress, they may still yet come out of the woodwork.

Could U.S. See Another Debt Crisis in 2017?

Americans better hope for the best, because fumbling the debt ceiling crisis 2017 could have irreparable consequences for the U.S. credit rating.

Fitch has proclaimed that, if the 2017 debt ceiling isn’t raised before the “extraordinary measures” provisions run out, it would initiate a negative U.S. sovereign rating trigger. The “tail risk” of a missed debt service payment by the “x” date would throw the debt market in total chaos. The U.S. dollar, the world’s reserve currency, would undoubtedly crater. There would be no do-overs at that point. Real-world effects would be felt by average Americans quite quickly.

The precedent of a U.S. credit rating downgrade occurred in 2011, less than a week after Congress agreed to spending cuts that would reduce the deficit by more than $2.0 trillion. At the time, the credit rating agency S&P requested that the United States make a plan to tackle the nation’s soaring debt, along with raising the debt ceiling in the near term. The S&P wrote that the “plan that Congress and the Administration recently agreed to falls short of what…would be necessary to stabilize the government’s medium-term debt dynamics.” (Source: “S&P downgrades U.S. credit rating,” CNN Money, August 6, 2011.)

As far as I can tell, the S&P has been silent about the prospects of another downgrade. However, if they were concerned about “medium-term debt dynamics” five years ago, it’s probably safe to assume that the issue is on their radar screen. It’s not like America has experienced rapid growth or repaired its balance sheet during that time to create additional fiscal headroom. Quite the opposite, actually.

Final U.S. GDP growth data in January confirmed that the average annual growth rate in the Obama years was just 1.48%, the weakest of any expansion since at least 1949. Obama was the only sitting president to have not had even one year of three percent GDP growth. Real median household income is down 2.3 percent, while labor force participation has fallen from 65.7% to 62.8%. 13 million more citizens require food stamps to survive, and poverty levels have risen sharply.

No matter how much statisticians try to massage the numbers, it looks ugly under the hood. Besides the cosmetics of “strong” employment figures, aided by the reclassification of who is deemed “unemployed,”  very little is robust in the economy. It’s clear that the U.S. isn’t in a better economic position than the last time the S&P downgraded its rating.

Yes, the U.S. dodged a bullet by remedying its housing crisis, but that was through massive stimulus spending, which has left a balance sheet in tatters. Many things have changed since then: the U.S. Federal Reserve has a huge Treasury securities portfolio that it’s trying to unwind; the Chinese are net sellers of U.S. Treasuries (and have their own brewing economic crisis); and the public mood in the United States is tired of corporate bailouts, which have seen government debt soar out of control.

There’s also the matter of Trump’s proposed tax cuts. They call for a reduction of the top personal tax bracket from 39.6% to 33%, and the corporate tax rate would be slashed from 35% down to 20%. Even under the most rosy scenario, the plan would also lead to increased pressure on the federal deficit, which the Congressional Budget Office projects will rise to 146% of GDP by 2046. This doesn’t even include the intra-governmental debt in that equation.

The truth is, it’s not hard to imagine the S&P and other credit rating agencies acting to reduce their rating on U.S. credit, irrespective of whether the debt ceiling crisis 2017 gets solved.

It was only back in June 2016 that the United Kingdom had its AAA rating downgraded by the S&P after the Brexit vote. While not really an apples-to-apples comparison, it does show that the credit rating agencies can act aggressively when they feel that the creditworthiness of a country is in peril. With the U.S. budgeting for deficits near $1.0 trillion, there will come a time when interest payments, high rates on those payments, and entitlement spending overwhelm the system, causing absolute chaos in the bond markets. A credit rating downgrade would be the “it’s happening” moment.

While we’re not forecasting the debt ceiling crisis 2017 to end without an agreement, recent history shows that anything is possible on Capitol Hill. If an agreement is reached, the bandage will peel off slowly (higher deficits, stagnant economy); if no agreement is reached, the bandage will be ripped off violently, destroying the dollar and sending interest rates soaring.

Whether it’s a stake through the heart or a boiling-frog scenario, it all leads to the same place, one where we would rather not be.

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