Friday, September 25, 2015

John Boehner Resigns & Government Shutdown

Boehner Is Out: What This Means For Government Shutdown Odds And The Debt-Ceiling Fight

In the aftermath of John Boehner's surprising resignation announcement, the punditry has been scrambling to opine what this departure means for the odds of a government shut down, some saying the likelihood has increased, while others, such as Goldman, confident shutdown odds are materially reduced. The truth is likely in the middle, and while the odds of a government shutdown next week are reduced as a Continuing Resolution now appears more feasible, the probability of a broader shutdown in December once the CR expires, have materially risen.

But while a government shutdown would be good news for those who claim (correctly) that the US government has not done anything in the past 7 years punting all decisions to the Fed instead, what's is much more problematic is that the US Treasury will need an increase in the debt target ceiling in November as shown previously, before any continuing resolution is expected to expire.

The upcoming power struggle in the GOP will make any successful and sustainable kick in the US debt limit very tough, especially when one realizes that as a result of accrud debt layering, the real US debt is, as of this moment, about $18.5 trillion - about $400 billion above the statutory debt limit of $18.1 trillion. It also means that in order to kick the can solidly for the next 2 years, the next debt ceiling will have to be just about $20 trillion. There will be quite a substantial shock among the right after realizing this unpleasant development.

In fact, a quick look at the Treasury market reveals a well-known pre-debt ceiling development: negative yields. In fact, the Bill market is now negative all the way through December 24, suggesting that the debt ceiling showdown will likely take place at the very end of the year once again, only this time investors aren't waiting until the last moment to rush into the safety of near-term bills and are starting to pile in.

Perhaps the best explanation of the upcoming drama in the neverending government funding drama comes from Stone McCarthy, which just issued the following summary:
Prospects for a Government Shutdown and Debt Limit Battles
Key Takeaways:
  • We think House Speaker Boehner's resignation reduces the odds of a government shutdown next week, but increases the odds of one later in the year.
  • Boehner was facing an impossible choice between appeasing hard-liners in the party threatening to unseat him and avoiding a government shutdown. Now his job is no longer a factor.
  • Will the far-right flank of the GOP be more inclined to compromise after Boehner's departure? We don't think so.
  • We think Treasury will need an increase in the debt limit in November, before any continuing resolution is expected to expire.
House Speaker John Boehner announced this morning that he is resigning from Congress at the end of October. We think Boehner's decision reduces the odds of a government shutdown next week.
As we wrote in a comment two weeks ago, Boehner was faced with an impossible choice between appeasing the far-right flank of the Republican party or avoiding a government shutdown.
Congress needs to pass a continuing resolution (CR) to avoid a government shutdown next week. Most Republicans are opposed to any continuing resolution (CR) that doesn't strip Planned Parenthood of its funding. But Boehner knows that a CR that "de-funds" Planned Parenthood is basically a dead end. In order to get the votes to pass a CR free of Planned Parenthood riders, Boehner will need to get some help from Democrats. That would have put his job as speaker in jeopardy, but now that he's resigning, that's a moot point. And while Boehner, like other Republicans, may want to cut off funding for Planned Parenthood, we don't think he wants to provoke a government shutdown in the service of that goal.

We do think that the Boehner resignation may increase the risks of a government shutdown in December, and also increase the odds of the Treasury violating the debt limit or running out of cash before November. The conventional wisdom is that Majority Leader Kevin McCarthy will replace Boehner as speaker. We're not sure that matters much -- the next speaker will still face the same difficult choices as Boehner, and if he compromises too much with Democrats, his tenure could be short-lived.

For us, the key question isn't so much who replaces Boehner as it is how the hard liners react to the Boehner resignation. Will they be mollified and therefore more willing to compromise on Planned Parenthood and the other fiscal issues dividing the two parties that we discussed in our 9/11 comment, or will they be emboldened and dig their heels in further? Our hunch at this point is the latter.

Senate GOP leaders failed yesterday to advance a continuing resolution (CR) that cuts off funding for Planned Parenthood. (The House voted last week to cut off funding for Planned Parenthood.) According to most reports, the Senate will take up a CR on Monday that funds the government through December 11 and leaves Planned Parenthood funding intact. We're not sure how the logistics in the House will unfold, but we expect that Boehner will move to advance a "clean" CR -- with the help of Democrats -- before the new fiscal year starts on Thursday.

But what happens in mid December or whenever a CR expires? Congress will still be faced with the same unresolved budget issues it faces today. Will Boehner's departure make it any easier to come to agreement on spending levels for the full fiscal year? At this juncture, we don't see how it would.
We think Congress will need to address the debt limit before December. In our September 10 comment, we projected that Treasury will have both exhausted its measures that allow it to issue debt and run out of cash in the third week of November. Based on cash flows over the last two weeks, we think the risk is that cash runs out a little bit sooner. September tax collections have been running weaker than our forecast, although there is still some chance for a late-month surprise with individual estimated income taxes coming in stronger than expected.