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‘Good Luck To Everybody’: It’s ‘Hard To Predict’ How Debt Ceiling, Government Shutdown Will Play Out

Do you still have questions about the looming debt ceiling debate and the possibility of a government shutdown?

Sure you do. Not the least of which, I’m sure, is this: “why in God’s name would a President risk a U.S. default and a government shutdown over something as ridiculous as funding for a border wall that America most assuredly does not need?”

The answer there is simple: because Trump has made a promise he can’t keep and as he told Pena Nieto in January, not building the wall now will make him look even more foolish than he already looks and he “can’t live with that.”

So, here we are. Of course the wall isn’t the only issue, but there is little question as to whether Trump is making things worse by making threats at campaign rallies and tweeting insults at lawmakers. Here’s the bottom line from Goldman:

We believe the odds of a brief shutdown are 50%. There are several arguments against a shutdown, particularly that Congress simply kicks the can with a temporary extension, delaying the real debate until later this year. However, with little chance that Congress will fund the border wall, a fractured Republican majority in Congress and a decision that ultimately rests with the President, the outcome is hard to predict.

Yes, “hard to predict.”

And even for Goldman, who should have an easier time “predicting” how things will turn out with the administration given that they basically run it.

Here are a couple of notable excerpts from the bank’s latest on this, presented in Q&A form:

But shouldn’t the risk around these issues have eased now that Republicans control the White House and Congress? In theory they should, but the split in the Republican party makes for a more complicated political dynamic in two respects. First, congressional Republicans lack a working majority in the House on most major fiscal issues, like raising the debt limit or passing spending bills. Since taking the majority in 2011, Republicans have rarely been able to pass debt limit or spending legislation solely with Republican votes in the House. Exhibit 1 shows the composition of support for several of the major fiscal bills passed over the last several years. For the most part, this was because concessions were needed in the Senate, where Democratic support was necessary regardless of who controlled the majority; and until this year, such legislation needed the approval of a Democratic president. Second, we note that President Trump has kept considerable political distance between himself and congressional Republicans, often dealing with them as if in a different party.

GSDC1

Again, note that last bolded bit. Really, that’s being charitable. Trump isn’t just “dealing with them as if in a different party,” he’s treating them like he treats everyone who says or does something he doesn’t like – that is, he’s treating them like an enemy because he believes that everything is a personal affront.

So let’s say we do get a shutdown. How long do they normally last? Here’s Goldman again:

Historically the median shutdown has lasted only three days, but recent shutdowns (in the 1990s and 2013) lasted longer. Exhibit 2 presents a histogram of the duration of government shutdowns from 1977 to the present:

GSDC2

Goldman also reminds you that while the debt ceiling and the federal spending deadline will be considered together, they are separate issues from a technical perspective. One constrains the Treasury from borrowing to finance spending that’s already gotten the green light, while the other constrains the government from spending further regardless of whether the Treasury has the money to finance the spending.

So whither markets? Well, here’s a look at the median change over the course of shutdowns from 1981 to 2013:

Shutdowns

As far as the debt ceiling and Treasurys, you already know the story, but here’s Goldman one more time:

In light of our view that the Treasury should have enough cash on hand to make scheduled payments in the week of October 2, this suggests that the disincentive to hold Treasury bills due to the debt limit will be greatest regarding bills that mature on October 12. The left panel of Exhibit 5, which shows the highest yield among bills that mature shortly after the debt limit deadlines in 2011, 2013, 2015, and this year’s announced deadline, demonstrates a modest amount of aversion to holding these securities. While the effect has been limited so far, it has occurred much earlier ahead of the deadline than it did in prior years.

GSDC5

As far as Trump goes, we imagine he’s got the same message for everyone about all of this as he had for Texas when the state was staring down a hurricane on Friday… “Good luck to everybody“…

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