What Does the Shutdown Mean for the Debt Ceiling?

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As much as everybody would like to put on blast goggles, keep their heads down, and avoid the political trench warfare that has once again come to dominate Washington, it does not seem possible to simply ignore the partial shutdown of the federal government. Without a continuing resolution in place, Uncle Sam tripped into the new fiscal year missing appropriations for all nonessential U.S. government activities.

Economists, pundits, the public, and politicians are still trying to figure out exactly what the shutdown means and what effect it will have on the economic and political situation in the U.S. What happens in the short-term is somewhat clear: approximately 400,000 government employees are furloughed until further notice, most government activities that do not protect life or property are shut down, and Americans adopt the look of someone who has been embarrassed by those chosen to represent them.

Americans are used to brinkmanship by now and have generally become adept at navigating the endless bureaucratic sea of finger-pointing that drowns out most productive dialogue (Question: who’s to blame? Answer: everyone). Many observers are already looking past the shutdown to the next big threat on the horizon: the debt ceiling.

It’s the same story as in 2011, but this October, the U.S. gets to start a new chapter in the seemingly eternal debt ceiling debate. It might not be totally fair to call the looming U.S. budget problem the “elephant in the room,” but some iteration of the idiom seems appropriate. It’s not that policymakers don’t want to discuss the problem — it’s just that recent history suggests they are incapable of being productive when they sit down to negotiate.

So here’s the problem: the U.S. government reached the debt ceiling in May. Since then, the U.S. Treasury has engaged in extraordinary measures to avoid a federal default. These measures are expected to run dry in the middle of October, just a few weeks away.

Speaking to the Economic Club of Washington, D.C., earlier in September, Treasury Secretary Jack Lew explained:

“If Congress fails to act and those measures are exhausted, we will have to use what cash balances we have on hand to fund the operations of a nearly $4 trillion government. At that point, meeting our nation’s financial obligations — including Social Security and Medicare benefits, payments to our military and veterans, and contracts with private suppliers — will be put at risk.”

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It’s still unclear what effect the current shutdown will have on Congress’s ability to address the debt ceiling issue, but a survey conducted by Reuters suggests that most economists — 40 out of 51 polled — think that the chance of government default is still less than 10 percent. Some economists did think that the risk was higher than that, but none put the likelihood more than 50 percent.

These expectations may change if the shutdown is prolonged and politicians remain unable to emerge from the deep trenches they have dug on either side of the aisle, but as it stands, the markets seem to be treating the shutdown as a temporary phenomenon. Major U.S. equity indexes advanced, gold and oil declined slightly, and the yield on the 10-year Treasury increased only modestly, to 2.644 percent.

So what bills will be due later this month? Bloomberg Television’s “Market Makers” tackles the question:

Don’t Miss: Is Debt Ceiling Drama a Bipartisan Effort?

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