FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 6, 2017

1. Not Much Time Left For Trump/GOP Legislative Agenda

2. Congress Has a Jam-Packed Schedule For June & July

3. Trump Administration Officials Differ Over Debt Ceiling

4. What Could Happen if the Debt Ceiling is Not Increased

5. June & July: Let the Debt Ceiling Political Games Begin

Overview

You may recall back in early April when the mainstream media was warning us of a government shutdown which was to occur on April 29. You may also recall that in my April 11 issue of this E-Letter, I stated that there would not be a government shutdown on April 29 or anytime soon thereafter.

What the media failed to notice (or ignored) was the fact that the Treasury Department stated in early April that it could fund the government using so-called “extraordinary measures” until October or maybe even early November. So no government shutdown was possible until that time.

Yet in late May Treasury Secretary Steven Mnuchin warned Congress that US tax receipts have slowed in recent months, and that the government is now likely to reach the debt ceiling of $19.809 trillion as early as sometime in August. He called on lawmakers in both chambers of Congress to pass a new debt ceiling increase before the long recess in August and early September.

The fear is that the Treasury will exhaust its extraordinary funding measures sometime in August, and the government could be forced to default on some of its debt obligations. This has never happened before and probably won’t happen this time either. But…

While there is time between now and when Congress adjourns on July 28 to increase the debt ceiling, both the House and the Senate have a lot of important business on their plates in the meantime. There is also the week-long House/Senate recess for the Fourth of July. Thus, the risk of not getting a debt ceiling increase by recess on July 28 is higher than usual in my opinion.

A failure to reach a debt ceiling increase by July 28 could cause havoc in the financial markets just ahead. For that reason I will focus on the debt ceiling issues we need to be aware of today.

Not Much Time Left For Trump/GOP Legislative Agenda

President Trump and his GOP allies on Capitol Hill have made it through nearly half their first year in power without a single major legislative achievement. Other than the confirmation of Supreme Court Justice Neal Gorsuch, the Republicans aren’t even close to passing any major legislation.  If that’s going to change, it must start soon.

Before we delve into the long list of legislative priorities facing lawmakers between now and the end of the fiscal year, let’s look at the congressional calendar for June and July. The light blue bars represent the days the Senate will be in session in June and July. The dark blue bars represent the House of Representatives days in session.

For the Senate, there are only 20 sessions in June, starting yesterday, and only another 15 sessions in July – for a total of 35.

For the House, there are only 18 sessions in June starting yesterday, and only another 13 sessions in July – for a total of 31.

Most politicos don’t believe this 117th Congress has enough time to accomplish all of the important business needed to get done in the rest of this political year which ends on September 30, much less by July 28 ahead of the five-week recess.

Even if time weren’t the issue, there’s the fact that this is one of the most contentious and partisan Congresses we’ve ever seen. Given the disdain on the part of Democrats (and even some Republicans) for President Trump, it seems unlikely that he will be successful in negotiating with both sides to keep his legislative agenda on track. It could get very ugly just ahead!

Congress Has a Jam-Packed Schedule For June & July

In addition to raising the debt ceiling, the Senate desperately needs to repeal and replace Obamacare. The House barely voted to repeal it, and neither side seems to know how to replace it. I will be very surprised if this critical issue is settled by the end of this fiscal year.

Then there is the issue of President Trump’s tax reforms. He wants to lower the corporate income tax rate from 35% to 15%, as well as lower and simplify the tax rates for individuals and married couples. There is growing talk that tax reform may not even happen this year.

President Trump keeps saying that a tax reform bill is moving through Congress, but the fact is there was no formal tax reform bill moving through Congress as of last week. The same can be said for the president’s other major priority, an infrastructure spending bill.

On top of all that, there is President Trump’s FY2018 budget he submitted last month. As expected, it was declared “dead on arrival” and there is no way to know when, or if, Congress will pass its own budget.

There are other priorities as well that will compete with the debt ceiling issue for time in the House and Senate chambers these next two months. My fear is that lawmakers may delay the debt ceiling issue too long, not realizing what a major battle it will be.

Trump Administration Officials Differ Over Debt Ceiling

If the issues discussed above weren’t enough, Treasury Secretary Steven Mnuchin and White House Office of Management and Budget Director Mick Mulvaney are banging heads over how best to enact the new debt ceiling legislation.

Secretary Mnuchin, the former Wall Street financier, has called for swift action on a “clean” debt ceiling bill that is not encumbered by other related budgetary and/or spending issues. Last week, he told members of Congress that the sooner they act on a new bill, the better, and that “it would be my preference” that the legislation be devoid of any riders.

Meanwhile, Director Mulvaney, a former House member from South Carolina and co-founder of the arch-conservative Freedom Caucus, is demanding that Congress load up the bill with tough policies for reducing spending and slowing the long-term growth of our debt.

During an interview last week with the Washington Examiner, Mulvaney compared the debt ceiling to a fiscal “smoke alarm that has traditionally been used to step back and try and assess why we are spending more than we have, and what we are going to do about it.”

As a three-term member of Congress, Mulvaney repeatedly pressed for spending reforms linked to a vote on raising the debt ceiling. He argued that the consequences of failing to increase borrowing authority in a timely fashion were not as serious as portrayed by the Obama administration, financial experts and credit rating agencies such as Standard & Poor’s and Moody’s.

By openly challenging Mnuchin on debt management questions that have historically been the purview of the Treasury Secretary, Mulvaney may be trying to galvanize his conservative GOP allies to demand that new debt ceiling legislation is laden with spending cuts.

At the very least, it is unusual to see the administration’s two top players on spending and fiscal matters air their differences over the debt ceiling so publicly. There is speculation that Mulvaney is either speaking for President Trump or is speaking with his tacit approval.

It is unfortunate that this disagreement is occurring in public since it detracts from the sense of urgency in Congress. If Mulvaney is speaking for the president, it remains to be seen how long Secretary Mnuchin will stand for being openly disagreed with by another member of the Trump administration. Or for that matter, how long President Trump will allow it to go on. I expect not long. The point is, the mainstream media has been largely silent on this issue.

What Could Happen if the Debt Ceiling is Not Increased?

Of all the matters on Congress’ plate, raising the debt ceiling may be the most important priority for the next two months. As a conservative, I always like to see some spending restraint attached to bills that increase the debt limit, but this time could be the exception.

Let’s say Congress isn’t successful in passing a debt ceiling increase by July 28 when lawmakers scatter all across the country for over a month. Let’s also say that the Treasury expends all of its extraordinary measures sometime in August, and Congress is not around to pass a short-term “continuing resolution” to fund the government. In that case, all hell breaks loose!

Under this worst-case scenario, the government could be forced to begin withholding interest payments to some or all of its creditors, halt the issuance of Social Security checks, furlough hundreds of thousands of federal employees and temporarily close national parks and many government agencies.

The fear that will pervade as we get closer to the Treasury exhausting its extraordinary measures could wreak havoc on the financial markets. Stocks could plunge; bond yields could spike higher; and the US dollar, which is already trending lower, could crater.

Given all the unusual factors attached to the current need to increase the debt ceiling, and the very unhealthy political climate, I could see a lot of turbulence in the markets just ahead. In a worst-case scenario, a debt ceiling crisis could even result in a new recession.

June & July: Let the Debt Ceiling Political Games Begin

Advancing the date for action on the debt limit to sometime in August, as opposed to late October or early November, could present problems for House Speaker Paul Ryan and other Republican congressional leaders.

Republicans control the House, but a number of their members -- particularly about three dozen members of the conservative House Freedom Caucus -- have opposed raising the debt  limit. That means GOP leaders will have to rely on votes from Democrats to help pass such a measure. This also happened in the 2015 vote when 167 Republicans opposed the debt ceiling suspension measure, which passed  266-167 with Democrats providing 187 “yes” votes.

The Freedom Caucus said in a statement last Wednesday it will demand, as it has previously, that any debt ceiling increase be paired with measures to cut or cap spending to help balance the budget in the future. The group said Congress should address the matter before August.

Republican Representative Jim Jordan of Ohio, a founding member of the Freedom Caucus, said, “We’ve known that we are approaching our debt limit for a long time, and the responsible thing to do is address it early and avoid a last-minute crisis. But any debt limit increase should be paired with meaningful spending cuts to address our debt."

Other Republicans and even some Democrats have argued that raising the debt ceiling to allow the nation to pay its bills is a “must-pass” to avoid financial chaos, and that it should be carried out in a clean measure with no policy riders attached.

When Senator John Cornyn heard the news last week that the debt ceiling deadline had been moved forward to August, he said he was confident his chamber could pass the debt ceiling increase by that time.

Representative John Yarmuth, the top Democrat on the House Budget Committee, said, “We want to get this done as soon as possible. We are ready to talk."

Wall Street’s main credit-rating companies said last week they’re confident an agreement will be reached in time.

For the sake of avoiding a lot of turbulence in the markets just ahead, let’s hope they are right.

Finally, keep in mind that the President has the authority to call a Special Session of Congress at his discretion. We’ll see if it comes to that.

Hoping your seatbelt is fastened,

Gary D. Halbert

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