In-depth analysis on Credit Writedowns Pro.

More on why the sequester may matter more than the debt ceiling

This analysis via Stan Collender and Greg Sargent on the political calculus Republicans in Congress have to make dovetails with what I wrote yesterday why a US government shutdown is likely by the end of March. I think the analysis also makes sense for the Republicans politically.

[private_gold]

given the three options — debt ceiling, sequester, continuing resolution — the debt ceiling may actually be the worst rather than the best place for the GOP to make a stand this year.

From a logistical point of view, refusing to increase the debt ceiling won’t have the impact on federal spending the GOP wants and needs to show it’s base because spending is not automatically cut if the debt ceiling isn’t increased. Add the chaos that could create on Wall Street, and the anger that would likely cause from the bond market, and the GOP doing the equivalent of holding its breath until it turns blue on the debt ceiling might not win it anything at all.

By contrast, the sequester is an immediate spending cut. Yes, it includes military reductions the contractor community hates, but over the past two years the GOP has already repeatedly demonstrated it is willing to throw the Pentagon under the deficit reduction bus. Plus, House and Senate Republicans might need military spending supporters to push the White House and congressional Democrats to substitute other spending cuts for the military sequester — what the GOP wants — and actually having the sequester go into effect could be the best way to make that happen.

Not extending the continuing resolution that expires on March 27th at midnight and shutting down the government for a few days or weeks might also be a better option than refusing the raise the debt ceiling because that too would result in immediate spending reductions. The spectacle of a federal shutdown and the obvious demonstration to the GOP base that would be of the willingness of Republican members to go to great lengths to cuts spending might be seen as a big plus.

Again, the goal for Republicans here is to limit the size and scope of government by making tax and spending cuts, irrespective of the economic impact. Allowing the sequestration items to take effect and shutting down the government would best achieve this. Moreover, given that we have already seen tax hikes, Republicans are keen to show thie limited government bonafides and the number of political fights for them to do so is large. They will have to take a stand on one of these fights. They are just deciding which fight serves their political interests most.

Source: Capital Gains and Games

[/private_gold]

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.