The current US shutdown is all about the stoush over the funding for the US Health program introduced by President Obama.
But the market is focusing on the next problem facing the US Government, which is the debt ceiling and the expectation it will be hit by the end of next week, potentially triggering a US Government default.
Chart: A.Gary Shilling and Co.
Gary Shilling is the doyen of market economists. He probably has the best forecasting track record on the planet when it comes to the US and investment themes more broadly.
He noted that any default would be a “financial disaster” and also reprised Fed Chairman Ben Bernanke from June this year when Bernanke said:
A government shutdown, and perhaps even more so, a failure to raise the debt limit, could have very serious consequences for the financial markets and the economy… The
Federal reserve’s policy is to do whatever we can to keep the economy on course.
Wiggle room is important in politics, but neither the debt ceiling or growing rhetoric on either side of the aisle gives much room to move.
Last night the protagonists seemed to back into their corners, with Democratic Senate Leader Harry Reid going postal on Republican Leader John Boehner with an aide saying:
Americans across the country are suffering because Speaker Boehner refuses to come to grips with reality. Today, Speaker Boehner should stop the games and let the House vote on the Senate’s clean CR so that the entire federal government can re-open within 20-four hours.
Our colleagues at Business Insider in the US reckon that Reid is going to call Boehner’s bluff.
The US Congress has form on this sort of thing. In the weeks after Lehman’s collapse they didn’t pass Hank Paulson’s first TARP Bill and markets cascaded from that point, not the Lehman collapse.
It’s a high stakes game of chicken, but don’t be surprised if there is no compromise.
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