Don’t Fret DC Debt Drama

By August 31, 2017Debts

Don’t Fret DC Debt DramaThink that title sounds familiar?  It is.  We’ve been here before.  And, as before, the “debt ceiling” is a gold mine for some politicians, journalists and analysts.  A possible government shutdown, or reaching a “hard” debt ceiling, are both fun for pessimists to talk about.

It seems to happen every couple of years and, as we’ve always said in the past, any dire warnings you’re hearing are completely overblown.

Just to make it clear up front, it’s important to recognize that a government shutdown and a debt default are not the same.  Although it’s theoretically possible for both to happen at the same time, they really are different kinds of events.

A government shutdown happens when a president and Congress fail to agree on a budget, or a “continuing resolution” – which funds government agencies until a budget is passed.

But much of government is on autopilot.  Even with no budget, taxes still get paid (unfortunately) and debt payments still get made.  The military still operates, as does Border Control and air traffic control.  “Essential” government workers still go to work and get paid.  Checks still get churned out for Social Security, Medicare, Medicaid, Food Stamps, and other entitlements.  And “non-essential” government workers usually get paid back for the time they didn’t come to work.  In other words, a government shutdown is not catastrophic.

Hitting a hard debt ceiling and missing payments to bondholders is a more serious issue.  But, it’s highly unlikely to happen and we’re confident the Treasury Department would find a way to prioritize payments.

Tax receipts are more than enough to cover debt payments; instead, Treasury can delay payment to federal government vendors.  Some liberals say delaying payments to vendors is the equivalent of a “default” but they’re just playing word games.  If this were true, Illinois would already be in “default” since it has billions of dollars of unpaid bills.

All this being said, we think in the end that the debt limit will be raised by late September.  Ideally it would include policy changes that limit future government spending, but we’re guessing that’s a hope that won’t materialize this time around, at least through the debt limit process.

After eight years of recovery, the government should be arguing about what to do with its surplus. The real problem isn’t hitting the debt ceiling, it’s the fact that government is too darn big.  What really matters is policy changes on taxes, spending, and regulation.  The political class won’t let the money run out.

Article written by First Trust Portfolio’s Economic Team – Brian S. Wesbury, Chief Economist, Robert Stein, CFA and Strider Elass.

This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

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