Why The 2013 'Debt Ceiling' Debacle Will Be Worse Than 2011

Tyler Durden's picture

Having passed the 'easy-do-nothing' bill that created a 5% uplift in US equities, D.C. have left the most difficult set of issues for last: entitlement reform, which Republicans have said they will insist upon in return for raising the debt limit, and tax reform, which the President has said he will insist on in return for entitlement reform. The upshot is that reaching an agreement on the next debt limit increase could be at least as difficult as the last increase in August 2011. As Goldman notes, over the next two months, policymakers will have to focus on three issues: (1) how to raise the debt limit, which will begin to constrain Treasury borrowing by early March; (2) whether to reform entitlement programs and/or the tax code to reduce spending or increase revenues by a similar amount as the increase in the debt limit; and (3) how to address the spending cuts scheduled to take effect under the "sequester," which was delayed to March 1. The next debate on the debt limit will be the fifth "showdown" on fiscal policy in the last two years. However, one new twist to this now familiar routine may come from the rating agencies, which look likely to be more active in 2013 than they have been since 2011.


Via Goldman Sachs,

We had previously estimated that fiscal policy at the federal, state, and local level would weigh on growth by 1.6pp on a Q4/Q4 basis in 2013; we believe the final package will be similar at around 1.5pp drag on growth. As before, we expect the effects to be weighted toward first half of the year, as shown in Exhibit 1.


One aspect of the fiscal cliff remains somewhat uncertain. The spending cuts under "sequestration" that were slated to begin January 1 2013 have been delayed until March 1 as part of the compromise just passed. Lawmakers are apt to attempt to delay sequester implementation further, probably once again taking a piecemeal approach and enacting a temporary delay of a few quarters or a year.

Although we continue to think Congress will delay the sequester at least once more, it does seem likely that it will eventually take effect, or at least that policies targeting some of the same areas of the budget (i.e., defense and domestic appropriations) will be implemented instead.

Raising the debt limit will be the more significant policy challenge over the next couple of months. Congress last raised the debt limit in August 2011. The Treasury formally reached the debt limit of $16.394 trillion on December 31, 2012 and is now operating under "extraordinary measures" (accounting strategies used to minimize Treasury securities held in government accounts). While the timing is always hard to predict, at this point it appears that the Treasury will exhaust its financing capacity by March 1, when it must make a number of large monthly payments, particularly related to Social Security and Medicare. Congress will need to raise the debt limit by that point if it has not already. While a failure to raise the debt limit should not have implications for the Treasury's ability to make interest payments or to redeem existing securities, it could lead to a sharp reduction in spending, including fiscal transfers to individuals, payments to contractors, and payment of tax refunds which tend to be fairly heavy during this period.

Unfortunately, the upcoming increase may be more difficult to enact than the increase in 2011. Few spending cuts had been enacted before the previous increase, which left lawmakers with several areas of the budget from which to pull potential savings. Congress eventually settled on $2.1 trillion in spending cuts, essentially all coming from a reduction in spending appropriated by Congress (about $900bn from caps on "discretionary" spending, and $1.2 trillion from "sequestration"). While hardly non-controversial, these cuts did not affect specific programs but instead capped overall spending, thus reducing political opposition. The fiscal agreement Congress just passed increases revenues by about $600bn over 10 years (compared with a full extension of expiring income tax cuts), and while this second round of savings was much more controversial than the first, a majority of the public supported the tax increase, which was targeted on high incomes.

If lawmakers continue to target a stabilization of the debt to GDP ratio over the next several years, they would need to go further than the two packages enacted since 2011. Most of the high-profile fiscal reform proposals offered over the last couple of years target around $4 trillion in savings over 10 years, or a bit more than $1 trillion beyond what has been agreed to already. A one-year extension of the debt limit would also require an increase of around $1 trillion, making this an obvious target for the next round of deficit reduction talks. However, this would be a difficult goal to reach, for several reasons:

  • Both parties have proposed some additional spending cuts, but neither has specified this magnitude of cuts: Republican leaders have said they want structural entitlement reforms as part of a deficit reduction package, but have not been very specific in their proposals. The President has been more specific in his budget, but proposes a smaller amount of entitlement-related cuts, and most of them relate more to payment rates for health services and products rather than changes to benefits or eligibility. It is simply politically more difficult for either party to propose, let alone agree on, significant cuts to entitlement programs than it is to make just about any other change to fiscal policy. However, this is the only major area of the budget that hasn’t been addressed in the fiscal reforms to date.
  • The President says he will not negotiate on spending cuts as part of a debt limit increase. President Obama has indicated he will not negotiate with Republicans on spending cuts for the next debt limit increase. Since a prolonged failure to raise the debt limit is politically unsustainable, the White House may simply decide congressional Republicans will eventually vote to raise it.
  • Tax increases would become part of the debate if entitlement reforms are considered. Although the President has indicated he will not negotiate on the debt limit, he has also indicated that whenever entitlement reforms are considered, he expects those to be balanced with additional tax reforms (i.e., spending cuts must be balanced with tax increases).

These factors imply that the next debt limit increase will be at least as difficult to enact as the last one was, and that there is a clear possibility of breaching the limit and causing more significant disruptions to government financing. [ZH: Adding further angst, in the summer of 2011 politicians had started the debate some three months prior to the real deadline. This time it appears that nothing serious will happen until the 11th hour as usual, meaning far more last minute volatility.]


One potentially greater source of uncertainty than in 2013 is the possibility of negative credit ratings actions. Standard & Poor's, Moody's, and Fitch have all indicated that their ratings are contingent on US policymakers agreeing to additional fiscal reforms in 2013 that would stabilize the ratio of public debt to GDP over the medium term. Fitch in particular has also raised the prospect of a downgrade if the debt limit is not raised "in a timely manner." So while we expect that market participants might have become less sensitive to political gyrations in Washington, the possibility of rating agency action could add a new twist to what has started to become an old routine.

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becky quick and her beautiful mouth's picture

you know, they could just pass a budget. remember those?

fonzannoon's picture

The debt ceiling pillow fight will be nowhere near as nasty as 2011. It will get passed relatively easlily with very few spending cuts and tax hikes along side it, if any. The US will be put on warning with the possibility of a downgrade in 2065 if they don't start taking care of their long term fiscal situation.

Zer0head's picture

fonz you are absolutely correct ,unless Boner is tossed.  If he keeps his speakership not only will this be a pillow fight but it will be the precursor to a super majority for Obama in the final two years of his term.

fonzannoon's picture

I will go one step further in this dystopian nightmare. If boner is tossed and the repubs play hardball, O makes an announcement that he is hiking he ceiling by executive order. He will make the announcement on the daily show and the crowd will carry him around like a king while Jon stewart tries to jump up and lick his asshole

pods's picture

Thanks for that early morning visual Fonz!



old naughty's picture

Let's close the Congress. Let the States run their own. Save the pay-outs. And it will not get any worse than 2012.

Chief KnocAHoma's picture

OBAMA - (Laughing as he reads the Drudge Report.) That fat bitch Hillary can't stay on her feet. 

PELOSI - (Mumbles from under the desk.) 

OBAMA - (Taps her on the head.) What did you say bitch?

PELOSI - (Looking up with slober running down her face.) That isn't very respectful of women Mr. President. 

OBAMA - Bitch did I ask you to speak? Now act like you are Chris Mathews and suck harder.

SilverRhino's picture

That was a completely disgusting (but funny visual).  Still had to downcheck that for obscenity (pelosi doing the deed ... evil!!!) though.  


Room 101's picture

Boner? Tossed?  LOL!

The GOPussies wouldn't know what to do without him.  

ElvisDog's picture

it will be the precursor to a super majority for Obama in the final two years of his term.

Unless Obama gets everything he wants and the U.S. goes into a currency crisis before the 2014 elections (a non-negligible possibility). In that case, the Dems get slaughtered in the 2014 elections. What you wrote will happen only if the ponzi keeps going for two more years. It might, but I wouldn't bet money on that happening.

Joe moneybags's picture

" only if the ponzi keeps going for two more years."

Growing budget deficits have been a way of life in the U.S. for more than 130 years.  What difference will 2 or 3 more years make?  That "Day of Reckoning", game-over, reset, won't come.  It hasn't in Japan in 22 years, and it won't happen here: things will morph and evolve, and the debt will just be a large number in a computer.

Half_A_Billion_Hollow_Points's picture

You are missing many things from your thoughts:  Japan is out, can't buy tbills, and will likely become a net seller out of necessity (1 trillion there).  China is sick & tired; the Chinese are getting richer and their middle class would benefit enormously if the yuan went up 40% or more.  That would mean wall-mart changes from "everyday low prices" to "premium imported chinese goods" overnight.  Oil scarcity will continue to unravel, and prices will rise.  Finally, during your 130 years, we've never been, even once, at ZIRP NIRP + moneyprinting $120,000,000 per hour.


Welcome to the endgame

NoDebt's picture

Agreed.  Neither side wants spending cuts.  That would mean somewhere, sombody's consituency starts to feel pain.

The GOP bluster will prove again that it is just that- bluster.  They will fold like a cheap suit, but on the 11th hour, just to make it look like they tried really hard.

The system is running them now, not the other way around.  Rudder is locked in position, all levers have been pushed up into the "run until failure" position. 

ElvisDog's picture

US will be put on warning with the possibility of a downgrade in 2065

A credit downgrade means nothing in a world where the Fed buys 60-70% of all new treasury issuance. Does the Fed care about what the credit rating of the U.S. is when deciding whether to buy Treasuries or MBS? Not at all. Plus, every other major country or bloc on Earth is as bad or worse when it comes to financial fraud, ponzi deficit spending, etc. as the U.S.

Muddy1's picture

HUH???? WHAT???? Novel approach you're suggesting.  Unfortunately passing a budget doesn't guarantee fiscal responsibility, national debt reduction, or and end to malfeasance.


Tombstone's picture

Sure, they could pass a budget.  But would they have the guts to stick to it?  No way they are going to handcuff themselves when it comes to spending on an ever increasing size of government babysitters.

SheepDog-One's picture

Yea well....just as likely the only effect from the dreaded debt ceiling will be +3% on stawks again.

HelluvaEngineer's picture

Please jump in and short this pig market so that we can get the S&P back up to 1500 again, at which point we will crush it and steal everyone's 401k. 

SamAdams's picture

Sorry, went long 7.62 & .223 over a year ago. The return is far greater than gold, and i continue to hold.

Racer's picture

Mentioning 'rating agencies' and 'active' in the same sentence?


Pharming's picture

The reality is that America is yet to wake up to the full extent of its fiscal nightmare.




I think Roubini was talking about my wife.  Wake up woman!  (She won't be reading this)

falak pema's picture

this should wake her up : 

In short, the “mini deal” on the fiscal cliff dodged all the important questions. By not including spending cuts in the deal, the Democrats have emboldened Republicans who are determined to slash taxes but lack a plan to pay for it. It is again up to Washington’s policy makers to fix the problem before the market does it for them. Tuesday’s deal suggests this will not happen with any ease."

Read more: http://www.businessinsider.com/roubini-america-fiscal-nightmare-2013-1#ixzz2GvFdrGGi

No more trips to the 5* beach hotel in the caymans on those perks. The only thing sleeping beauty really understands. 

AynRandFan's picture

Roubini should be introduced as the "Welfare State Economist".  He favors higher taxes for everyone because, as he says, a welfare state is necessary in the modern world of globalization.  Excuse me if I disagree.

cxl9's picture

Yes, the good professor holds that it's "right and necessary" that everyone try to live off the labor of others, with government acting as intermediary and collecting the rake. Perhaps Mr. Roubini should simply pay his neighbor's bills and leave the rest of us out of it.

Pharming's picture

Perhaps he should go back to Italy and tell everyone that the days of early retirement, tolerable poverty, and sucking off the wealthy will soon be over.  It can't go on forever...

Pharming's picture

Honestly, I only agree with the statement that the majority of Americans need to wake up.  To me, Roubini is just another of those economists that likes to hear himself splattered all over the news.  I suppose I gave him a little bit of credit by posting his link.  I apologize.

TotalCarp's picture

Seriously.. beyond all the rhetoric does anyone still think they will do anything but a last minute "save"? I mean who in that rotten town has any testicular prowess to point out the obvious and take a stand, now that good ol' Ron Paul went home?

Folks, mkt will drop 3% & scare Boehner, there will be a lot of speaches about "american people" and then the can will get kicked down the road. Keep moving, nothing to see here.


youngman's picture

I agree all show and no go......just like Europe....lots of speeches..meetings ..behind closed doors for some reason..but nothing big...we need a dictator to make a real change here...again i have changed my view ....I no longer look at what WE DO.....I am looking to see what other country are doing because of us.......I think we will be the ugly kid in High School that noone wants to play with ...or even associate with...

TotalCarp's picture

US has 2 pillars of strength - military might and (the debased, the raped but yet accepted just about everywhere) US dollar. Those 2 are very closely interconnected. This is why the Military Industrial Complex that i hate wholeheartedly and that has been sucking US dry is out of reach of politicians.

Until one (and the the other) of these 2 crumbles the others will have to associate with the US.. begrudgingly as it may be..  

RiverRoad's picture

It's the guns that keep the butter "flowing" fer sure.  We just keep making 'em an offer they can't refuse.

Spastica Rex's picture


Nothing else really matters at this point. It'll be easy to see when things are really changing.

DosZap's picture


Will be losing his chair very soon.

max2205's picture

Spy +45% since 10/11

BlueCollaredOne's picture

Spying (on us) up 675% since 9/11.  


francis_sawyer's picture

but it's for "THE CHILDREN"... remember?

Cursive's picture

IF Republicans were serious (and we all know that they are not), they would do nothing.  This whole situation is akin to how dead bodies are treated in Nigeria.  Touch it, and it's your responsibility.  So, the smart thing to do would be to let the sequester run it's course and let Obama make the cuts.  It would also have helped if Republicans would simply explain that Obama effectively increases our national mortgage until we can afford nothing, just like ordinary Americans are feeling price shocks at the grocery store.  Of course, again, this assumes Republicans are serious and/or not complete and utter dumbasses.

smiler03's picture

Thank you, now I understand why I've been offered $20 million to handle a funeral in Lagos.

Room 101's picture

"Unfortunately, the upcoming increase may be more difficult to enact than the increase in 2011."


Since when has jacking up the so-called debt ceiling been all that difficult?  And think about this for a moment: the executive branch has already been floating the idea that the President can unilaterally raise the ceiling anyway.  We all know the repugnicans don't have the balls to call him on it if he did so, so why all the angst?

Here is how it'll play out: Obama will play it out and threaten and cajole and get pretty much all that he wants.  If he doesn't, he just plays the unilateral ceiling raise card at the last minute and gets all he wants anyway.

This is much ado about nothing. 


Tsar Pointless's picture

Yep. Democrats cried about the "Bush" tax cuts. Now, those same Democrats vote to permanently keep those same "Bush" tax cuts.

Democrats cried about massive defense spending and intrusive spying under Bush. Yet, now, we have the continuation and expansion of both.

Republicans cry about profligate spending and debt increases by Democrats. Yet, when they have the chance to actually reduce one or both, they don't. They keep increasing them, if only at a "slower" pace.

Two heads, one coin. Just what our Founding Fathers wanted. (Sarcasm. Yes, sarcasm.)

GMadScientist's picture

Because those two contexts (10 years, 1 depression, and $3T apart) are otherwise completely comparable?



youngman's picture

I give the Obama Nuclear Option a 50% chance right now......I think he wants to do it...he thinks he is king....and he wants to rule as one...

Tsar Pointless's picture

Every president since Nixon (other than Carter) has wanted to be king, or at the very least thought he was or was treated as such by his party.

Think of this: Carter may very well be the least-harmful president we've had in over 40 years.

GMadScientist's picture

Perhaps you merely fail to understand that Af-Pak was blowback from Carter and Zbig?


Room 101's picture

It all depends on who the GOPussies select as their "speaker" later today.  If it's BooHoo Boner, it's about a 10% chance of using the unilateral decree.  There is no need: Obama will get all he wants and then some.  If by some miracle the GOPussies show some spine that we have yet to see, then the chances of the unilateral decree option go up to well over 50%. 

Pharming's picture

I have to agree with you.  The congress is a full of Eunuchs.  Our representatives...

pods's picture

If I want to watch hockey I will put in the Slapshot DVD.


GMadScientist's picture

Just overlay a goal and penalty box over some old Ali v Frazier footage.