It’s going to be an interesting week.
Unless you have been hiding under a rock, you will be aware that the US Government has been largely shut down since 1st October because it has no Congressional budget authority to spend money. More importantly, on 17th October the US Treasury runs out of money, and can’t borrow any more. It’s hit the debt ceiling again.
Approving the budget and raising the debt ceiling requires agreement amongst both houses of Congress and the President. They can’t agree because of what is now intractable partisan politics.
So now it’s now an old fashioned game of chicken! No-one has any idea how this will end.
Today I came across an interesting analysis of the problem, in the Harvard Business Review blog, built around the ideas of game theory …
“Let’s consider what House Republicans have learned from their two years of debt-limit brinkmanship.
They have learned, first of all, that it works. They got the White House to agree to a bunch of automatic spending cuts (the sequester) in 2011, and then in early 2013 they were able, from what seemed to be an exceptionally weak bargaining position after President Obama’s re-election, to keep most of the Bush-era tax cuts from expiring and to force yet another debt-ceiling battle only a few months later.
More broadly, Republican office-holders and activists have learned over the past couple of decades that making what at first sound like unreasonable demands (no new taxes, no gun control) and repeating them for years on end can actually shift the terms of the debate to the point where the demands seem normal. It has been a successful strategy.
Finally, for President Obama and Senate Majority Leader Harry Reid, the lesson from the last two years is that negotiating over the debt ceiling is a loser’s game. Every time they accede to House Republican demands, the GOP comes back a few months later demanding more — even after a clear election loss. So it shouldn’t be surprising that Obama and Reid might be willing to risk economic calamity in order not to have to submit to such blackmail again.
Put all this together, and it looks like we have the makings of a train wreck. It also looks like it’s probably up to Republican House Speaker Boehner to avert it, which he appears to acknowledge. But that’s not as reassuring as it might sound when you consider how unstable the tactical ground is upon which he stands. So, that’s depressing.”
World leading bankers are warning of catastrophe if this doesn’t get resolved. (I suspect that is self- serving, because the biggest losers would be in the bubble financial sector.)
Nevertheless, a failure to agree on something will certainly be disruptive to financial markets and eventually the real economy. So look for a mighty kick of the can down the road … along with the attendant puffery from everyone, about everyone being a winner!
Until, of course, the can runs out of road …
Oh, and by the way, go back to the middle paragraph I quoted above. Re-read that now in the context of our last 3+ years of “stop the boats”, “end the waste”, “no new taxes”. As the HBR says … “It has been a successful strategy.”