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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tradewithdave's picture

You fail to acknowledge the platinum easy button as endorsed by Krugman, Pete Peterson and Sacajawea.  



Jack of All Trades's picture

The media will of course need to come up with some catch phrase to replace "fiscal cliff" to ratchet up fear so our "leaders" can then swoop in and save the day (by kicking the can again).  You've got some possibilities:

-Debt Ceiling Debacle

-Sequester Showdown




TerminalDebt's picture

They'll just vote to have a future fiscal cliff in return for a debt ceiling increase.

Then when time comes they'll vote to cancel the fiscal cliff, problem solved, carry on.

adr's picture

As per government calculations, nothing is a drag on GDP anymore. That final Q3 calculation should have been negative, but every subtractor was switched to an addition.

The Politburo has nothing on these clowns today. To say that the propoganda released on the citizens of the USSR had more truth behind it than the reports issued by the US Government today, is not a lie anymore.

By the way, I have it on pretty good authority that Walmart and other major retailers sold less than 50% of the holiday specialty merchandise. You know those large cardboard displays that go in the aisles. That product isn't put on clearance. It gets shipped back after the selling period expired. Some of the displays sold less than 10% of the inventory. Also more than 50% of the seasonal merchandise that could go on clearance only moved once the stuff got a 50%+ off tag.

Against whatever propoganda the Market puts out, the real story is devastation at retail.

vote_libertarian_party's picture

So just to be clear, Fitch is saying unless the gvt CONTINUES with the $1,xT in deficits uninterrupted they will downgrade?


(last paragraph)

busted by the bailout's picture

I'm not sure the spending cutters have much leverage at this point.  The only negotiating hammer appears to be the debt ceiling.  But what if the Administration ignores it and challenges the constitutionality of that law? 

The legal argument could be that Congress cannot order, by statute, the Executive Branch to spend money on certain things, while also making the tax laws that determine the government’s revenue, and then limit the Administration’s ability to borrow the money needed to pay for spending required/authorized by statute.

In that scenario, the administration could ignore the debt ceiling, keep on borrowing and paying bills, and Congress has no lever to force them to negotiate.

I don’t think we will see any cuts in FY13 spending, and only immaterial amounts in FY14.


AynRandFan's picture

Nancy Pelosi went on record this morning supporting that very position under the 14th Amendment.

busted by the bailout's picture

Thanks, I'll look for that news.  I figured something was up when O said he wasn't going to negotiate on the debt ceiling again.  They have a plan to circumvent it. 

If so, I think the Republicans are screwed.  They can't let the sequester kick in because they don't want the DoD cuts.  So the sequester will most likely be punted again, or perhaps repealed altogether and replaced with a new plan with different cuts starting in FY14.  When we get to FY14, it will then probably be changed again.

Joe moneybags's picture

Buster, you have really hit upon a very important forthcoming change in governmental policy: the elimination of the debt ceiling.  Clearly, it is an arbitrary number, and policy, designed by the Congress, and not specified by the Constitution in anything but an interpretive way.  It's elimination will be heralded as a great positive.

GMadScientist's picture

Gonna be pretty fucking hard to get past specific text enumerating congressional power to borrow money on the credit of the US.

busted by the bailout's picture

Yeah, but I thought Obamacare was hard to justify under the Constitution too, yet John Roberts did it anyway.

That would be the purpose of challenging the Constitutionality of it: There is a conflict that must be resolved.  If Congress has the power of the purse and authorizes both spending and tax revenues, how can they then also restrict the Executive Branch's ability to comply with those laws made by Congress?  in order to resolve the conflicting laws, Congress will have to yield to increasing the debt ceiling, or abolish it so that the existing spending laws / appropriations can be honored, IMO.

AynRandFan's picture

It's really strange that the Dems are ok with painting themselves in a corner as the "Party party", with no interest in fiscal prudence of any kind.

Tsar Pointless's picture

It's not strange at all. Not when you consider that the first and only priority of a party is to gain and retain political power.

AynRandFan's picture

Well, that doesn't say much for American voters, but I guess you're right.

Spastica Rex's picture

American voters want more stuff. All of them.

More food stamps.

More take home pay.

More iPhones.

More one-ton pickups.

More BMWs.

More trips to Aspen.

RiverRoad's picture

With thanks to those Harvard BS marketing graduates.

GMadScientist's picture

You assume the legion of elderlies collecting checks and boner pills from Uncle Sam don't have the same laissez-faire attitude about fiscal responsibility.

"Fuck you, whippersnappers! I'll be long gone..." - Gran-pops


Salon's picture

Please spread this link far and wide if you want to know the game plan for the new American Revolution. Assymetric warfare can succeed and does not require centralized command.

Here are your orders from the resistance.

 Our rulers want to disarm us peasants. We cant be trusted.


RiverRoad's picture

The 1% of the world have three unhappy  choices:  They can busy themselves in a futile attempt to shove austerity and their bill for the party down the throats of jobless sheeple OR they can provide jobs for the sheeple to pay those bills with OR they can pay the damn tax/bills themselves. 

ElvisDog's picture

or (D) they can continuously debase all of the world's currencies while making sure that their own personal wealth extraction activities stay ahead of said currency debasement. They maintain or expand their positions of wealth while the costs are pushed on to the other 99.9%.

Hmmm, what will they do? I'm guessing choice (D).....

RiverRoad's picture

Which is really the ultimately futile choice #1 (and I like your expanded take on that) since   people with no jobs have no taxes to pay....

maximin thrax's picture

I think you are confusing the 1% with the 0.01%. Not everyone in the top 1% of income is a bankster.

unplugged's picture

Absolutely meaningless under Central Planning / Central Printing / Marxism.

Did you ever hear the old USSR squabble about such trivial matters ?


moneybots's picture

Number of times debt ceiling has not been raised.  ZERO.

SmoothCoolSmoke's picture

I terms of the Markets, I just do not see it being as bad. If I recall the SP dropped about 150 pts last time around the DC block.  A replay of that would just be too easy for the shorts, for whom nothing has been easy.

ElvisDog's picture

This article is silly. Have the authors been paying attention at all the past couple of months. The Republicans have absolutely no leverage in part because the Dems have absolute control over the MSM and therefore the message that gets out to Joe and Jane SixPack. If the Republicans try to hold the line on spending cuts they will be portrayed as the ones starving Granny or keeping medical care from getting to disabled children. The Republicans will roll over again, there will be no spending cuts, Obama will get two more years (at least) of debt limit room, and full steam ahead.

maximin thrax's picture

If so, then the Repubs need a fallback position. That would be the states - the other constitutional entities.

How about all Republican governors tender the resignation of all Republican congresscritters, then appoint Democrats as replacements? That puts it all on one party, the Democrats, to fix the fiscal mess. A scheme, of course, to weaken the central government in hopes that the states can step in and do what's best for their citizens.

The States need to get a little rebellion going. To wit, each state should collect every dime of taxation normally collected by the IRS from its citizens and businesses, to be remitted in one check from the state to the IRS. That's just fifty tax returns (plus territories) instead of millions.

Let the feds know that that check might be slow in coming, or not at all, if the federal government continues to impinge upon the freedom and prosperity of their citizens, whom they are bound to protect.

A citizen cannot stand up to the IRS, and to the misuse of his taxes and the abuse of his Dollar by the central government. A state can, especially in concert with other states, and should.

SKY85hawk's picture

Perhaps the NEW CONgress will consider Wasteful spending.  Here's a few items to start with:

-The Congressional Budget Office published a "Budget Options" series identifying more than

$100 billion in potential spending cuts;


 Waste Book 2012:  Rep. Tom Coburn wants changes, too!




Wasteful Govt Spending – Source: Unconventional Wealth newsletter pitch

National Institute of Health (NIH) funded studies include:

$386,000 to study massaging rabbits: a study to determine proper massage duration time on rabbits;

$453,000 to study breathing during meditation: a study to determine how important breathing is during meditation;

$1,158,000 to study how to lose weight through meditation: a study to find out if meditation encourages weight loss;

$458,000 to study yoga & meditation therapy: a study to see if meditating and doing yoga helps you lose weight;

$438,625 to study behavioral effects of meditation: a study to see if meditation relaxes people when stressed out;

-General Services Administration spent $800,000 at a party hosted in Las Vegas with the goal of finding ways to streamline the administrative duties of government workers;

-They spent $350,000 to figure out if golfers needed bigger golf holes;

-Our government spent almost $1 million studying the sexual attraction of fruit flies;

spends about $1.5 billion a year on advertising.  a third of the time, agencies spending this money don't get competitive bids;

The unfortunate truth is that our financial future is in the hands of the very people who've let our debt mushroom to over $16 trillion.

Worst of 2012 – Source: By David Zeiler, Associate Editor, Money Morning

-NASA spends $1 million a year on developing recipes for foods which astronauts could prepare while visiting Mars


-The U.S. Navy bought 450,000 gallons of biofuels for $12 million—or almost $27 per gallon;

-Pentagon recently spent $998,798 shipping two 19-cent washers from South Carolina to Texas and $293,451 sending an 89-cent washer from South Carolina to Florida;

-A GAO audit classified nearly half of all purchases on government credit cards as improper, fraudulent, or embezzled;



maximin thrax's picture

Ah, but you see... there IS NO waste. Just an increase in velocity of money, which is just what Dr. Keynes ordered. Houses get bought, as do cars and cable packages, with that money. And if that money comes off the Fed's press, to be spent into the economy to buoy asset prices and keep the Lexus dealers' doors open, so much the better. If we DON'T borrow huge amounts of money and spend it, according to our broken-window-fallacy-believing overlords, that's when we'll be in really big trouble. Whatever it takes to make a trillion-dollar deficit, Washington's on board with.

SKY85hawk's picture

Sad but True  .    .      .

skydrake's picture

Wellcome in Europe

polak potrafi's picture

to watch how they play the Texas hold'em


So far the situation at the green table doesn't look too good for the Barak crowd. George DoubleU cuts extended for all who do not care to join Gerard F. Depardieu at the Tey Partey on Cayman Islands in exchange for ... 24 dubious billion as the price for starting the 1.2 trillion secastration in March already OMG!!! (gasp). True. The evil eye watchers claiming that US is a three hundreds year experiment that will go bust in case of any major internal problem due to the selfishness of the participants can be wrong... and only few sarcos shall defect to diminish the projected 0.6 trillion in tax revenues (over the 10 year horizon). The truth is that we can only come to you (the rich folks) with tears in our wet brown eyes and cry... please do not leave us... please do not leave US. 


On the other hand one can believe that folks making over .5 million a year can go deep to a desert ranch with any girl/guy they want, take some peyotl or watever they want and listen to the answer blowin' in the wind.


The outcome of the New Years deal is puzzling everybody. 0.6 trillion in revenues plus 1.2 trillion in spending cuts (over the next 10 years) is much more than we have hoped for. Is the March deal going to be as simple as that? Everything for nothing. 1 trillion for nada. Raising the debt ceiling for implementing 1.2 trillion in spending cuts. Barak people going down the cliff and GOPsies flying above. Even Moody's does not believe in that.


BACKDOOR agreement: Who knows what has been cooked up already behind the closed doors of the White House. Maybe some crazy scenario of castrating the sequestration altogether. Naa...h, political deals are made "now or never". Nobody trusts in supporting something in the future in exchange to pass another thing right now. Barak bleeds in the corner unless...


... Dick is already cleaning his shotgun pondering which one of his fellow lawmakers should be invited for the next wild goose hunting to provide some hedging for Lockheed in those difficult times.


Seriously. You can rest assured that we all here in EU and other NATO alied states have wetted our panties hearing that the "zupa" 1.2 trillion in spending cuts that are going to kick in in two months include about 0.5 trillion of defense cuts (in the mid-term horizon). Maybe at least some reserve? For a worry, or a global co-op? Whatever? We sure do not want to see another lame duck session changing into a sitting duck cook up.