While many thought that the recently averted government shutdown meant that politics on the Hill would return to normal. The reality could not be further from that, as the furor over the deal that averted the shutdown, caused the House Speaker to step down and his expected successor to decline the position.
Impact of the Leadership Vacuum
Without the House Speaker, Congress is not able to move forward on a number of critical issues in particular the government’s borrowing limit. At present, government spending is rapidly closing in on its current debt ceiling of $18.1 trillion which could be exhausted by the end of the month.
Without Congress functioning normally, it may be almost impossible to push through the increase in time. While the Treasury is no stranger to juggling payments during the frequent times of political in-fighting, there is a time limit on how long it can try to keep all the plates spinning before one and then all of them come crashing down.
The real catch is that while Congress can cut spending at any time, once it has authorized a payment the Treasury is then legally obliged to pay it. In some cases this is not an issue, the government pays late and some penalties, but certain obligations are not so forgiving, in particular, interest on Treasury Bills which could create a default.
If the debt ceiling is not raised in time and the Treasury is unable to meet its critical obligations then it will probably cause a crisis of confidence in investors, making them shift their money out of their investments in the U.S. government. The only way to get those funds back would be to raise rates significantly which could cause an additional interest cost, upwards of $75 billion a year, which would roll through the economy like a wrecking ball.
The last time this happened, in July 2011, this cost the U.S. its Triple A credit rating and loss of investor confidence. While this situation may not come to pass, unless the House can unite behind a leader and get things moving again quickly, the U.S. might be the next financial crisis.