Comment: The Government Shutdown.....

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The Government Shutdown.....

...... will be short lived and is just a dress rehearsal for the debt ceiling showdown. Failure of Congress and the White House to make a deal on the debt ceiling does not mean default. More likely it means the economy relapses back into recession.

Nominal US GDP is growing at an annual rate of about 2.5%. US federal spending currently weighs in at roughly 23% of GDP, in contrast to the historical average of 19.6% from 1946 to 2008. If the debt ceiling is not raised, the government will have no choice but to go COLD TURKEY to a balanced budget by cutting 18 cents out of every dollar it currently spends. Sudden elimination of 18% of the federal budget would bring US federal spending down to roughly 19% of GDP and by extension cut the annual GDP growth rate from a positive +2.5% to a negative -1.5% in a New York minute.

The only way this scenario could avoid triggering another recession would be if private sector credit expanded enough to fill the vacuum and make up the difference. The question is whether the private sector in aggregate has de-leveraged enough since 2008 to make private sector businesses and households feel comfortable enough to go out on a borrowing spree.

Ed Rombach