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Fiscal timetable for US likely debt ceiling first, then spending cuts

My position since October 2009 has been that the United States could not hold off deficit hawks for more than three or four years. 2013 is the deadline for that prediction to be fulfilled and we are right on schedule with the fiscal cliff and the debt ceiling showdowns.

The latest news on timing is significant because it could mean recession. As I wrote earlier today in my post on the Trillion Dollar Coin, I expect the debt ceiling fight to spark political animosity and to harden positions in Congress over other issues. And to the degree any large fiscal fights happen after the debt ceiling fight, we should expect more austerity than is commonly anticipated. [private_gold]Here’s what I’m hearing:

“Based on financial data from Treasury, we estimate that the government will be unable to pay all of its bills as early as Feb. 15,” Steve Bell, senior director of the economic policy project at the Washington-based Bipartisan Policy Center, said in an e-mailed statement today. “We have less time to solve this problem than many realize.”

Republicans in Congress want to focus on spending cuts in the current discussion over raising the debt limit, while Democrats counter that issues including taxes have to be a part of the negotiations.

Take these two paragraphs together and what they say is likely to happen is that the US will be forced to deal with the debt ceiling in mid-February and then afterwards it will have to deal with the sequestration-mandated spending cuts afterwards. I expect the debt ceiling debate to be resolved somehow. It’s not clear how but I do not anticipate default. But, we are indeed leading up to a fight to the finish. If we do get through this debt ceiling episode without cuts, there will be a lot of pressure on the Republicans to allow the spending cuts from the sequestration that they delayed at the beginning of the year to kick in. And I believe that is likely to occur, meaning no deal will be reached.

My logic here is:

  1. Debt ceiling fight first, sequestration second
  2. Republicans and Obama both loath to lose face because of promises to political base
  3. Debt default too onerous to contemplate. Republicans will capitulate knowing the sequester will allow them to live up to their promises to rein in spending.
  4. Debt ceiling raised
  5. Republicans hold the line on spending cuts and the sequestration items from the fiscal cliff are activated
Republicans will not miss two chances back-to-back to cut spending.

If this chain of events occurs, the likely result will be recession beginning in March 2013. I will be following up with this storyline as the debt ceiling and fiscal cliff negotiations proceed.

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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.