Recap 10-07-13: How this cycle can stop


It’s hard to see this impasse resolving much earlier than 10/17, IMO. By most estimates, the Treasury has enough cash to last until maybe 10/24 or so – which means that a deal reached by around that date will be sufficient to head off any risk of default. In this game of brinksmanship, a concession much earlier than 10/17 is an implicit sign of weakness, and both parties know it. The first mover is likely to have to make significant concessions.

IMHO, the root cause of this is a group of broadly misguided or apathetic citizens residing in predominantly poor, rural districts. Many of these citizens are angry about their economic situation, and expressed their anger by voting in angry representatives. But that particular way of protesting is misguided, and as long as these citizens continue their behavior, this cycle of fiscal impasses are likely to continue. A stoppage of this cycle is dependent upon either these voters changing their minds, or a change in opinion of the broader electorate.

This map of the Tea Party caucus districts is notable.

The vast majority of these states all receive, rather than pay money to the Federal Government. Remember that much of government spending is in the form of entitlements. Yet, they are voting for a government shutdown. However, since the vast majority of Federal Government expenditures have continued uninterrupted so far, (in the form of entitlement spending) the actual economic effect has been minimal. As a result, citizens there have not had any incentive to change their opinion.

However, there are substantial Social Security and Medicare payments going out on 11/1. (Some payments actually go out on 10/23, and the Treasury may opt to withhold those payments in order to conserve cash for debt payments) If the debt ceiling impasse continues, the Treasury is like to take extraordinary measures to pay Treasury coupons and principal only, while forgoing entitlement payments. If this occurs, citizens are likely to be forced to choose between their political views and their immediate economic difficulties. This, in turn, is likely to drive a quick change of opinion by members of both parties.

Without such an event, this cycle of fiscal impasses are unlikely to stop. US history is rife with examples of major events changing entrenched electorate beliefs. We may need to get such an event once again. Things need to get worse before they can get better.


Boehner’s claim that there aren’t enough votes to pass a clean CR is interesting. But Obama and Reid’s calls for him to allow a vote anyway to test that assertion seems to make such a vote less likely. If the vote fails as Boehner claims, he will only validate his claims but will be seen as being weaker since he had to “prove” that he was right. And if the vote passes, as seems likely, he will lose credibility with everybody. It’s not clear at all what sort of end game Boehner has planned. An optimistic take is that, by allowing things to play out, he is trying to weaken the Tea Party to the longer term benefit of both the Republican Party as well as the country. The far right has been challenging Boehner’s supporters in Republican primaries, and in general has been trying to get one of their own elected to the leadership, in addition to causing gridlock.


  • The NYT said the government shutdown has been planned for months. Republicans were planning to use funding of the federal government to repeal the healthcare act.
  • Euro area Sentix investor confidence was 6.1 versus 8.5 expected.
  • US Earnings season kicks off on Tuesday.

Upcoming Data:

  • Mon: RICS House Price Balance, Australia NAB Business Confidence, China HSBC Service PMI
  • Tue: German Trade Balance, Canada Housing Starts,
  • Wed: UK IP, FOMC Minutes, Australia CPI, Employment
  • Thu: BoE
  • Fri: Canada Employment, UMichigan Confidence, BoC Survey