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The US fiscal standoff should mean recession in Q2

Last Tuesday I updated you with my latest thinking about the twin fiscal debates on the debt ceiling and the remaining fiscal cliff items. I said then that the debt ceiling fight would come first and take precedence but that default on US public debt would be a step too far – and so Republicans would capitulate, forcing them to put their efforts into the sequester cuts that were delayed at the beginning of the year. The biggest change since then is that default looks to be off the table, making cuts during the debt ceiling standoff more likely.

Now the debt ceiling is still scheduled to become too much for even emergency spending measures to overcome by between “mid-February and early March of this year“. That means that we have about a month to reach an agreement on lifting the debt ceiling or default. As I wrote in my last post, Rand Paul has said that he wants the Republicans to push spending prioritisation as the only option available unless cuts are made. This effectively takes public debt default off the table. But it means an immediate and sharp slowdown in government spending. As Senator Paul put it, “we have tax receipts to pay for about 70 percent of the government and we’re running deficits of about 30 percent, so what I would say is pay for the 70 percent we would all keep going and stop paying the other 30 percent until we come to an agreement.”

Legal scholar Laurence Tribe wrote in the New York Times at the weekend that this option of prioritising spending if a debt ceiling agreement cannot be reached is the most obvious and likely one. President Obama has apparently signed up for this option too, having put aside the Platinum Coin option this past weekend and also apparently deciding against the 14th amendment option earlier today.

So this re-shuffles the deck and makes the most likely outcomes somewhat different. [Content protected for Gold members only]

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.