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Debt-Ceiling Vote Rife With Conflict 

Peter Lefkin 

Inside the Beltway  

Peter Lefkin


Peter Lefkin, head of government and external affairs at Allianz of America, explains why the 2015 debt-ceiling debate could be worse than the one we saw in 2011.
Key Takeaways
The US Treasury reached its debt limit on March 15. Effective today, the Treasury will stop investing in a pension fund for government employees. The move is part of a series of emergency measures put into effect to keep the government from defaulting on its debt, which currently stands at $18.1 trillion.
Accounting gimmicks and the shuffling of funds should allow the US government to operate until around Oct. 1, 2015 without extending its borrowing authority
The nation's public debt has doubled in the past 10 years and pressures looming from baby boomer retirements means that the problem is going to get much worse by the end of the decade, if nothing is done
Like other presidents before him, President Obama has asked for a "clean" bill with no congressional conditions
Republicans will demand major changes to reduce spending and other changes in Obama priorities, and fiscal brinksmanship will occur
No one knows where it will end; both parties will blame the ugly debate on the bad behavior of the other side
Perhaps the hardest and most cynical vote a member of Congress has to cast is the one to raise the debt ceiling, a necessity in order to give the US government authority to borrow money to conduct its operations. Lawmakers who vote for it do so as a burdensome obligation that they prefer to conceal, while those who vote against it take public delight in their actions—even though deep in their hearts they're happy when it passes.

The whole thing is always a bit hypocritical. Members of Congress, mostly Democrats but also some Republicans, have no problem with keeping the federal spending going with almost no restraint. Both parties, but particularly Republicans, dislike raising taxes on their constituents, with some elected officials equating raising gas taxes by a dime to the end of the US republic. The quickest and easiest thing to do is to just keep borrowing, and let future generations—Americans who are too young to vote—pay the bills.

To put it in historical context, the debt ceiling is relatively new. Before it was established, Congress had to approve each new issuance of debt. And in 1917, during World War I, when federal spending was greatly increasing, this proved to be too cumbersome. The debt ceiling has had a few different formats, with the most recent one established in 1940. Because spending has generally exceeded the amount of revenue coming in, the government has needed to borrow money each year—and this requires Congress to raise the debt limit. Since its inception, the debt ceiling has been increased, extended or suspended 92 times.

However, legislation that raises the debt ceiling, is politically painful. It's a peculiar acknowledgement of the fiscal irresponsibility afflicted on the people. And the average politician has as much enthusiasm for voting to raise the debt ceiling as a heavy drinker does when coping with his hangovers the next morning. Voting for the debt legislation is not a popular move among voters, who don't pay much attention to deficits while they're being run up. But they do get angry when we have to expand the nation's already bloated credit limits to pay the bills. Accountability? "No, not me."

A History of Divisive Debate
The fight over the debt ceiling has become part of the American political tradition, although not one that is normally associated with great honor. Every president in recent memory forcefully argues that the nation's credit shouldn't be held hostage and Congress should just simply increase the debt ceiling without any conditions. They point out that Congress has already approved the spending of the money and that the debt ceiling just ensures that its gets paid for. They usually don't get off that easy, particularly if the competing party holds one or both houses of Congress.

Members of Congress, of course, think differently, particularly when they come from the opposite political party as the president. For them, the debt ceiling provides them with the leverage to gain concessions from the president that they wouldn't otherwise get. In the rancorous 2011 debt- ceiling debate, congressional Republicans equated it to paying their college kids' credit-card bills. Yes, they would pay because they had an obligation to do so—but they wanted to make "damn certain that it doesn't happen again"

There is always a lot of drama, and the debate is predictable. Democrats will argue that we should put a stop to the politics because it's undermining respect for the US dollar. Republicans say they have a constitutional responsibility to block it from occurring. In the end, there's always some last-minute compromise, but not before a lot of threats and fears of a governmental meltdown.

Every president dislikes the debate on the debt ceiling for much of the same reason that members of Congress hate voting for it. It holds them accountable, at least for a short time, for the state of the nation's finances, which means increased debt. However, my view is that the debt-ceiling debate, however ugly, is good for the health of US society because it sparks a much-needed fiscal debate. The biggest areas of federal expenditures, which are Social Security, Medicare, and Medicaid, run on auto-pilot spending. The debt ceiling at least provides an opportunity to discuss reform, even if at the end the politicians do what they do best, which is to kick the can down the road. Eventually, they will have to do something—just not now.

Stopgap Measures and Accounting Gimmicks
Today, the US Treasury confronts its debt ceiling borrowing limits, which was established by Congress at the beginning the 2014. It essentially allowed the Obama administration to borrow what were needed to keep the government open another year, after which the Treasury Department would reset the limit and keep it from going any higher.

For its part, the Treasury Department can delay things a bit and still pay our bills a little while longer. Individual taxes collected in April and a variety of accounting gimmicks that have been used by both Democratic and Republican administrations in the past can provide a stopgap. The first public bow to the new reality that the debt ceiling was reached came in a letter to Congress from Treasury Secretary Jacob Lew. The first thing the government would do is suspend the issuance of state and local government securities, he wrote. You can expect an increase in activities designed to create the maximum amount of political pain against Congress. In the end, everybody expects the charade to be over around Oct.1, 2015 when the accounting games will be forced to end.

2011 All Over Again?
While the debt ceiling has been raised 69 times since 1960, the most prominent debate took place in August 2011. The House of Representatives had just eight months earlier converted from a Democratic to Republican majority, and the Republican Party, fueled by newly energized Tea Party Activists, was intent on holding the line against the massive increases in governmental deficits that had occurred during the previous three years. It was as nasty as it could be with escalating fears of a US government's default and, for the first time in history, a downgrade of the US governments long term debt by ratings firm Standards and Poor's.

Before Congress and the president came to agreement, the stock market had tanked by about 4% and global political leaders said that political brinksmanship in the United States was harming the international economic order. In the weeks before the agreement was reached, then Treasury Secretary Lawrence Summers, repeatedly warned Congress that failure to raise the debt ceiling would cause interest rates to rise. It was brinksmanship at its worst.

In the end, a last-minute agreement, aptly named the Budget Control Act of 2011, was reached. Among other things, the new law called for $900 billion in spending cuts over 10 years, and created a bipartisan congressional committee that was supposed to identify additional spending cuts of $15 trillion during same period of time. Anticipating that this would be easier said than done, Congress put in place an automatic sequestration mechanism that imposed cuts on defense and non-defense spending similarly, to get the job done in the absence of an agreement.

Lots of Fireworks
My take on this year's debt-ceiling debate is that it will even be more explosive than the past. Republicans argue that since President Obama has taken office public debt has grown to $18.1 trillion from $10.6 trillion, with the debt ceiling being increased six times. With the current US budget deficit at about $500 billion, but projected to grow to $1 trillion per year annually by the end of the decade, almost everyone believes that the nation's fiscal trajectory is unsustainable particularly as the baby boomers begin collecting their full Medicare and Social Security benefits. The politicians all hope that we can bail ourselves out through economic expansion. Yes, this would help, but it won't be enough. Sooner or later, lawmakers need to make a tough decision—something that the political class in Washington, D.C. does only as a last resort.

The political fallout from the debt ceiling impacts both parties, but the consequences for Republicans is greater. As mentioned earlier, the voting public really hates it when Congress raises the debt ceiling. However, if 2011 is any guide, the American people will hate it even more when they see that political intransigence puts the nation's fiscal health in danger and causes their own investments to fall.

In 2011, Republicans took most of the blame, and many fear that if this happens again, then it might derail their chance of winning control of the presidency in 2016. Republicans are in a very tight bind and face several dilemmas. On the one hand, their core electorate demands punishing President Obama and reducing spending. Yet on the other hand, they are both facing a recalcitrant president who dislikes them as much they dislike him—reaching any agreement is very difficult.

Republicans also confront the situation that the budget deficit issue earns them votes in the abstract, but costs them votes in the search for solutions. The nation can't get its spending problem in order unless they address Social Security and Medicare expenses, and these programs enjoy strong support from their current recipients, a majority of which are older Republican voters. Some political observers say additional revenue from taxes might be needed later on, but "No New Taxes" has been the governing mantra of the party for over a generation.

It's hard to say what will be at the center of this year's debate. Republicans are angry about the president's executive order, which suspended the deportation of undocumented immigrants, his refusal to allow the Keystone Pipeline to be built, and of course the Affordable Care Act. All three might be fodder as they seek concessions from the president on these issues to secure their support for increasing debt ceiling. Over the next six months, lots of other things will join this list. In the end, they might get some concessions but nowhere near as much as they want.

Where It Ends
Right now, it's hard to see how this exhaustive debate will impact capital markets. 2015 has ushered in a much stronger US dollar than anyone would have anticipated a year ago, with corresponding concerns that it's hurting exports. People are anticipating a long, delayed increase in interest rates. In the meantime, in the land of perpetual presidential campaigns, the campaign for 2016 has already started. This too will cloud the debate.

The debate over the debt ceiling will only be between Democrats and Republicans, but you'll probably see more intense battles within the Republican Party itself. Many of its Tea Party Activists are incapable of compromise and, left to their own devices, they will walk to debt default believing that being pure is more important than being prudent. In the end, House Speaker John Boehner will end up in the same place that he always is. He will secure a deal with the Obama administration that will be derided by many in his caucus, and he will rely on Democratic votes to get the measure approved.

Overall, it will be an ugly road forward, with several sideswipes against the guardrails. Both Congress and the president will be criticized a lot along the way, but if an eleventh-hour deal isn't reached, then the conventional wisdom is that it will hurt the Republicans the most. Speaker Boehner and Majority Leader Mitch McConnell know this. They will make sure the boat gets into the dock—even if it gets scratched along the way.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585,, 1-800-926-4456.


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