It’s almost that time again …
No, I’m not talking about the rapidly approaching start of the NFL season … although that is a happy coincidence.
I’m talking about that time-honored tradition in Washington, D.C.: Fiscal Follies, 2017!
It’s one of the longest-running dramas on Capitol Hill: The dreaded debt-ceiling debate.
Well buckle up. The latest rendition is about to play out all over again in September and into October, when the U.S. Treasury runs out of money. That is, if Congress fails to act to raise the debt ceiling (again) by then.
Making things even more-exciting this time is President Donald Trump playing a lead role for the 2017 production. Which means anything can happen … and probably will.
Of course, the D.C. debt-ceiling drama has been going on periodically for decades. It doesn’t always attract much attention, except for the occasional threat of a government shutdown.
The 2011 production brought down the house … literally, after a particularly nasty showdown that year led to an unprecedented credit-rating downgrade for U.S. Treasury debt.
That fiasco cost American taxpayers an extra $1.3 billion in higher borrowing costs …
And it coincided with the last stock market correction of nearly 20% in the S&P 500!
Is history about to repeat in 2017?
With Republicans in control of both houses of Congress and the White House, you would think a debt-ceiling extension is a done deal. And congressional leaders sound pretty confident that they can take action before the late-September deadline.
Of course, they were confident about repealing Obamacare, too … but it didn’t happen. And now, occupying the White House is a president who’s on record saying the federal government “needs a good shutdown.”
Adding to this year’s debt-ceiling anxiety is the fact that Congress doesn’t return from summer break until after Labor Day. That gives lawmakers just three weeks to work out a deal and pass a bill to raise the debt ceiling.
Fixed-income investors are getting nervous. Borrowing costs are on the rise already, as you can see in the chart above. And well ahead of the Sept. 29 deadline. Interest rates on 3-month T-bills have jumped to the highest level since the 2008 financial crisis.
Only a portion of this move can be attributed to the Fed raising benchmark rates. Some institutions are avoiding T-bills with maturity dates after the end of September, when the Treasury will technically run out of cash to pay off its obligations.
None of this is really surprising to me. That’s because nothing in Washington … or on Wall Street, for that matter … has changed since the last financial crisis hit our economy like a Category 5 hurricane in 2008.
In fact, in many ways it’s gotten even worse.
Total U.S. debt at all levels — government, business and consumer — is a staggering $175 trillion today. Much higher as a percentage of GDP than at the start of the financial crisis.
Undoubtedly, Congress and the White House will figure out a way to kick the can further down the road yet again. Perhaps only after some more fiscal drama in the weeks ahead.
But don’t kid yourself that they can somehow diffuse the ticking time bomb of debt. The ultimate day of reckoning is fast-approaching.
Good investing,
Mike Burnick
