While the government shutdown was painful for hundreds of thousands of Americans, the looming debt ceiling deadline, just days away, threatens to be much worse.
The debt ceiling deadline is March 1, 2019, just one week from today.
Here's how we got here...
A partial government shutdown began on Dec. 22. The catalysts were a failure by Congress and the president to agree on a budget. By the time it was even partially over, it had stretched into the longest shutdown of the U.S. government in the history books.
During the shutdown, nine executive departments were either completely or partly closed. That includes 800,000 government employees. Workers defined as essential were required to report to work as usual, even though they weren't paid until the shutdown ended.
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That closed about a fourth of the government's activities, from food inspection to national parks.
According to the Council of Economic Advisers, economic growth can shrink 0.13% for every single week the government isn't open. Kevin Hassett, the White House chief economist, indicated that they forecasted 0% growth in gross domestic product for the duration of the government shutdown.
But unfortunately, the looming debt ceiling crisis could be even more problematic...
What a Debt Ceiling Crisis Means for the Economy
All of that was not good. But as we said up top, there's a potentially even bigger crisis coming.
Every couple of years, Congress votes to hike spending limits that it has imposed on itself. In other words, it raises the debt ceiling. The debt ceiling is the maximum borrowing that the U.S. government will allow. In theory, it is supposed to rein in debt spending and keep U.S. government debt overall without limits.
But the theory goes by the wayside if Congress just decides to pass legislation raising the ceiling.
Right now, the U.S. debt in the aggregate just surpassed $22 trillion. And just like in a household, the more debt is owed, the more interest racks up. Overall, the levels become unsustainable.
Ultimately, if Congress keeps doing this, it will create a borrowing crisis as well. If Congress can't pay its debt service, lenders will start to view it about as favorably as banks view folks who can't pay their debt.
The debt ceiling is going to be a big deal in Washington, D.C., come March...
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There are ways to deal with the debt ceiling, but both sides need to agree. In the past, Congress has raised the ceiling. Last year, they suspended it. Or, the U.S. government will have to cut spending so that it can meet obligations with the money on hand.
But compromises may be needed to keep everything functioning. Given the extreme partisanship observed during the government shutdown, do we think compromise is likely? It may take a long while - and in fact, the outlook for compromise is bleak.
If the debt limit isn't raised or spending isn't cut, the U.S. credit rating could be downgraded. Essentially, the United States would be viewed like a debtor not paying on credit card bills because of impulse purchases over the past month.
That would be an economic crisis. Agencies in charge of credit ratings have threatened to downgrade the U.S. debt rating before. The last time the issue was discussed, Standard & Poor's, one of the leading debt rating agencies in the United States, reduced U.S. debt down one level, from AAA to AA+.
Now, AA+ is still a very good rating. But it doesn't reflect well on Uncle Sam to have debt downgraded any more than it would reflect well on your neighbor to have his credit score fall.
The other major agencies, Moody's and Fitch, kept the ranking at a top level. But this year, Fitch warned of a potential downgrade due to the continuation of the shutdown and the wrangling over the budget. They want to see the government operating and a budget passed.
This impacts the U.S. government debt payments even more, because the interest rate a borrower has on debt is in part a function of the length of the debt period and in part a function of the current credit score. The lower the credit score goes, the more the interest rate could increase.
Higher interest rates lead, overall, to more difficulty paying off debt.
What can result is a vicious circle. If Congress and the president can't agree on a compromise, the U.S. Treasury won't be able to issue any new debt. We need new debt to pay the government's bills, including for mandated programs like Social Security and Medicare. If the Treasury can't issue new debt, it will be limited to current monthly income just to keep operating.
A debt crisis or lengthy wrangling or an impasse all hurts confidence in U.S. credit and creditworthiness. This can ultimately make new debt more costly.
Now, on April 15, the Treasury usually sees more influx because of tax returns being filed. If people still owe on taxes for 2018, they pay then.
After tax day, the Treasury will need to rely on cash flow and issuing short-term debt at interest rates that are lower. But short-term debt can't finance long-term projects. Long-term debt is ultimately needed for ambitious projects.
Fitch termed the ultimate result of a shutdown government and the absence of a deal on the debt ceiling a potentially "more pronounced destabilization of fiscal policymaking."
It's no way to run a stable country.
The stock market and financial markets generally could feel the impact. The last time a debt ceiling impasse occurred, the S&P 500 dropped 20%. The dollar rose higher.
Stay tuned for what happens in March.
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