It appears the government shutdown will not be resolved quickly; brinksmanship likely will continue, with the focus shifted to the debt ceiling increase, whose deadline has been targeted as October 17.
This week we focus on why markets have reacted mildly to this point. Next, we address the possibility that—even if Congress fails to act—the US has options for avoiding default. Finally, we address the 14th Amendment to the Constitution that potentially provides a way out should Congress fail to act.
Why markets ignored Washington risk. “No-one believes that a temporary shut-down in some government activities is critical, but the debt ceiling is a different matter entirely. A default by the US government on its debt payments could be disruptive and set in train a series of events which would be hard for the authorities subsequently to control … he US political process has it within its power to end the uncertainty at very short notice when political calculations change. This is not a case of ‘can’t pay’, it is a case of ‘won’t pay’ … to a sensible outside observer, it seems improbable that enough members of Congress would act against the interests of the US to trigger a ‘won’t pay’ catastrophe. Investors have recent experience of very similar disputes in Washington … market disruption in earlier episodes turned out to be relatively minor and short-lived … markets remain eerily calm amidst the heat of the political battle.” Financial Times (tiered subscription model)
It is unlikely the US would choose to default on its sovereign debt. “Most observers, including the major investment banks, think it is very unlikely that the US would ever choose to default on any payments due on its sovereign debt, even if the debt ceiling is left permanently unchanged after 17 October The Constitution forbids using the threat of national default the way some in Congress are now using it. The 14th Amendment matters in the debt-ceiling crisis. It dictates that the ‘validity of the public debt of the United States … shall not be questioned.’ “It is true that the majority view, both in legal academia and among President Obama’s legal advisors, seems to be that the 14th Amendment provides no easy out for the President as he faces this crisis … still, the provision exists … and ought to weigh very heavily in the minds—and on the consciences—of the House Republican faction that is now unambiguously violating its letter and spirit. The very same imminent constitutional scholars who have publicly counseled Obama not to nullify the debt-ceiling law…have nevertheless acknowledged that the Framers of that provision did, indeed, mean to bar Congressmen from using the threat of debt-default as a coercive tool in the arsenal of everyday politics.” And in case you missed it, click here to read last week’s blog post which focuses on the partial government shutdown and it’s ramifications. We hope you enjoy reading these articles along with us and that you find them informative. Please forward this to your friends and family. J. Mark Nickell & Co. Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security. J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.
