2015 could wind up being the best economic year for the developed world in nearly a decade.
In the U.S., hiring over the past year has been stronger than any time since the go-go 1990s. GDP growth in 2014 was the best the economy experienced since 2010. Even growth prospects in Europe are looking up in the wake of the European Central Bank's launch of a quantitative easing plan. The ECB actually revised its growth prospects upward for once, estimating that the eurozone will grow by 1.5% this year rather than 1%.
The biggest potential risk to what looks like an accelerating recovery, however, is government. And with the government reaching an $18.1 trillion debt ceiling on Monday, Congress and the White House have a perfect opportunity to torpedo the economy. After that, the Treasury will need to resort to "extraordinary measures," or accounting tricks to keep government debt under the statutory limit.
Chris Krueger, an analyst at Guggenheim Securities, estimates that these measures will run out sometime around October 1, which gives the Republican-controlled Congress and President Obama about six months to come to an agreement on raising the debt ceiling.
The stakes are not small. The last government shutdown—when, in 2013, Republicans refused to raise the debt ceiling unless President Obama agreed to defund Obamacare—lasted just 16 days, but it was severely damaging to the economy. The Bureau of Economic Analysis estimated that the shutdown shaved off 0.3 percentage points from economic growth in the fourth quarter of 2013. If one assumes that GDP growth and job growth go hand in hand, that means that the shutdown led to the loss of tens of thousands of jobs. A longer shutdown could be even more damaging, especially if it lasts long enough to call into question the Treasury's ability to make interest payments to its creditors.
In an analysis issued to clients on Friday, Krueger listed six possible scenarios for Washington to reach a resolution to the impending debt-ceiling showdown:
- The Republicans "cave to Obama" and raise the debt ceiling cleanly.
- The GOP and the President meet in the middle on a "process-driven compromise," meaning that they would raise the debt ceiling under the condition that there is a process set up to reduce long-term deficits. Remember the so-called "Super Committee" that the President and Congress set up back in 2011 in an effort to reach a grand bargain on long-term debt.
- The President invokes the 14th amendment—which dictates that the "validity of the public debt of the United States … shall not be questioned”—to unilaterally raise the debt ceiling.
- The president "caves" to the GOP. This scenario might be similar to 2011, when President Obama agreed to deep budget cuts known as "the sequester" in return for Congress' vote to raise the debt ceiling.
- The minting of the "platinum coin." The Treasury is allowed to mint coins worth any amount it wishes. It could simply deposit those funds at the Federal Reserve in exchange for dollars with which it could pay U.S. government obligations.
- Do nothing, or what Krueger calls the "Thelma and Louise" scenario. If Congress and the President don't reach an agreement, the government will shut down. The U.S. could default on its debt, if it gets to the point where the U.S. stops paying interest on its debt.
Krueger, for one, believes the first scenario is most likely. The conventional wisdom is that the Republican Party suffered politically from the last shutdown, and the recent battle over Homeland Security funding ended with the GOP giving in. But things could change—six months is an eternity in politics—and the GOP might be emboldened by their electoral gains in 2014 to play hardball over the debt ceiling.
Now that Republicans control the Senate, the GOP's hand might be stronger this time around. For instance, Congress could send a debt-prioritization bill to the President, which would ensure that U.S. debt-holders would get their interest payments no matter what. This would allow the GOP to avoid blame for a default and reduce the risk of a government shutdown.
The Treasury Department, on the other hand, argues that debt prioritization isn't possible given the way its computer systems are designed to pay the government's bills. As Krueger writes, "Prioritization is a very grey area." Even if the government is able to ensure that the U.S. doesn't technically default, the situation would "get very ugly very fast," he says. After all, prioritization would require the government to not pay a large portion of its bills, from social security checks, medicare payments, troop salaries, or any of the many other services the Feds provide. This would deal a major blow to individual Americans and the U.S. economy.
The threat of a shutdown is one of the biggest risks facing the global economy in 2015. Let's hope the President and Congress can learn to play nice.