With the "will they, won't they?" drama of the Fed's FOMC meeting out of the way (at least for a month), next on the horizon is the U.S. debt ceiling.
The last deadlock over the U.S. debt ceiling resulted in the U.S. being downgraded from its AAA rating by Standard & Poor's for the first time in its history.
This time around, negotiations are just as bitter and partisan as the 2011 negotiations that led to this historical downgrade in the U.S. credit rating. The biggest block facing any Congressional approval of any resolution that would raise the debt ceiling is the issue of Obamacare. Last week, the Republican-controlled House passed a budget resolution that funds the government into December, but defunds Obama's signature legislation, the Affordable Care Act. With no possibility that the Democrat-controlled Senate will pass the bill, nor a possibility that Obama will sign the bill, it is unlikely that we will see a quick resolution of the debt ceiling negotiations.
As a result of negotiations during the 2011 debt ceiling stand-off, the debt ceiling was raised under the Budget Control Act of 2011. In a continuation of the U.S. government programme of Grandiose Sounding Bills, the No Budget No Pay Act of 2013 passed by both houses of Congress, the debt ceiling was suspended from February 4, 2013, until May 19, 2013. On May 19, the debt ceiling was raised to approximately $16.699 trillion to accommodate the borrowing done during the suspension period. The U.S. is scheduled to hit this ceiling in mid-October.
This headline figure leaves out some government liabilities. The U.S. Treasury principle amount of marketable and non-marketable securities currently outstanding stands at $16.949 trillion. This represents a debt-per-taxpayer of $148,182. The debt ceiling does not represent a cap on future spending per se, but instead debts accrued in the financing of existing liabilities. However, Republicans want to tie any raising of the debt ceiling with a balancing of the U.S. federal budget.
Last week, St Louis Fed president, and voting FOMC member, James Bullard, hinted that the Fed may yet taper the Fed's monthly asset purchases at its next meeting in October. The Fed shocked markets at its last meeting by holding off on any tapering of its $85bn monthly asset purchase programme, citing fragile U.S. economic growth. Should the U.S. debt ceiling negotiations enter a similarly bitter, partisan and entrenched stalemate as 2011, it may well influence any decision taken by the Fed to trim its asset purchases.
While the period of European economic instability that it accompanied in 2011 has abated and global economic conditions have changed considerably, the last debt ceiling stand-off hammered the dollar and drove-up U.S. Treasuries. At the same time, it drove gold up to record historic highs, breaking through $1,900/oz.
In the run up to any debt ceiling deadline, it would be unwise to underestimate the ability of Congress to descend into a quagmire of partisanship and vicious squabbling.