Chief Executive Officer Newsletter
Welcome to the CEO's monthly economic newsletter. The newsletter provides a basic narrative overview of recently published economic indicators for your reading pleasure. You should not rely on this information when making investment decisions, but rather seek professional advice from qualified investment advisors.
Since several of our governmental offices were recently shuttered, this Newsletter will not include the usual economic data. Instead I thought it would be informative to consider what happens when the US Government shuts down and what would happen if it went into default.
The U.S. Constitution requires that all expenditures of Federal funds be authorized by Congress and approved by the President. The U.S. Federal Government and the Federal budget process operate on a fiscal year cycle running from October 1 to midnight September 30. If Congress fails to pass all the spending bills comprising the annual Federal budget or "continuing resolutions" extending spending beyond the end of the fiscal year; or if the President fails to sign or vetoes any of the individual spending bills, certain non-essential functions of the Government are forced to cease activity due to a lack of funding. The result is a Government shutdown, which is what happened on October 1st.
The debt limit is the total amount of money that the United States Government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, etc. The debt limit does not authorize new spending commitments. Up until this recent reprieve, the United States Government’s debt obligations were authorized up to $16.7 trillion.
Default occurs when Congress fails to raise the debt ceiling. It also happens because we take in about 70-cents in taxes for every dollar our government spends; therefore it must borrow to pay the bills. This is like what happens when your credit card reaches its limit. Fortunately we do not have to go to our Congressional leaders for an increase. I do not take sides politically, but clearly both sides are culpable for the recent debacle since they seemed to be unwilling to offer any meaningful compromises until the very last minute.
Had Congress allowed the country to go into default, the first really big bill due (a $12 billion Social Security payment on October 23rd) would not have been paid. I suspect Congress would have heard about it loud and clear if that were to have happened.
It is important to remember we have been here before. Government has shut down seventeen times in the past 40 years. Eleven shutdowns ended with a deal, five were resolved with an agreement to temporarily fund the Government while debates continued, and one ended with Congress overriding a presidential veto. Surprisingly the Government shut down eight times under Reagan and twice under Clinton and we not only survived but, in fact, thrived economically under both presidents.
Hopefully Congress gets their act together before we find ourselves in the same situation again in 4 months.
Dennis A. Long
President & Chief Executive Officer
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