It is officially here. The Mayan calendar has expired. Could it be the Mayans actually predicted the end of responsible government, not the end of the world? If they did, it seems that they may actually have been correct. The US will hit the debt ceiling before the end of the year, and it seems unlikely any legislative effort will happen before New Years. We are going over the fiscal cliff. 

The Fiscal Cliff Still Looms, But The Debt Ceiling Comes First 

The US government is just weeks away from hitting the debt ceiling authorized by the Budget Act of 2011.  '

The currently valid debt ceiling is $16,394 billion, or $16.4 trillion.  

The currently outstanding US federal debt is $16,331 billion, as of November 30, 2012. 

This means that there is just $63 billion of authorized debt issuance to be used before the debt ceiling is reached. 

Since the federal government has averaged net debt issuance of more than $100 billion per month in 2012, it is likely that the debt ceiling will actually be reached before the end of 2012. 

When the Budget Act of 2011 was first passed, the debt ceiling limit of $16.4 trillion had been expected to last until the third quarter of 2013.  

Now, it seems, that projection can be added to yet another inaccurate forecast of the future.  

Treasury Short Term Solutions 

The debt ceiling is important for one simple reason: maturing debt is paid off by issuing new debt. 

Once the debt ceiling is reached, however, new debt cannot be issued. The threat is that the government cannot then repay maturing debt on time. 

The US Treasury has stated that it can use certain accounting techniques, which are essentially borrowing money from itself out of certain specified Treasury controlled  accounts, which can then be used to pay off maturing bonds, without issuing new bonds. 

These techniques, which are essentially equivalent to a lawyer borrowing from his “client’s funds” accounts, are able to extend the Treasury’s ability to redeem maturing debt to sometime in February. 

The same techniques were used when the debt ceiling was reached in 2011, prompting the Budget Control Act of 2011. 

At that time, the Treasury formulated an actual deadline date of August 2, 2011, upon which it would be unable to redeem maturing debt. 

To date, the Treasury has not issued a formal date for when their accounting techniques allow debt service to continue beyond the reaching of the debt ceiling. 

The Real Problem – Philosophical Dogma

The real problem is that the two political parties have differing views on the importance of addressing the debt issue. 

The Obama administration appears to view debt as something to be welcomed, as his offers of negotiation with House Speaker Boehner included a request to allow the president to raise the debt limit without Congressional support. 

This act, if granted, would likely have been deemed unconstitutional by the Supreme Court (in our view), since only the House of Representatives is allowed to initiate  new spending under the Constitution.  If the president had authority to raise the debt limit whenever so desired, this would be equivalent to authorizing the spending of new money. 

The Republican side of the argument is highly focused on reducing deficit spending, but has made not raising taxes a more important issue. Although some mild compromising has been made here, the tax issue has become the crow-bar to force the Democratic side to address spending issues. 

These two opposing stances have produced the stalemate that exists today. 

The irony, of course, is that taxes go up if a negotiated settlement isn’t reached, which makes negotiating tax rate increases a weak bargaining chip. 

This makes the debate a fundamental confrontation of principles. 

Unfortunately, the ideological stubbornness of both sides makes a meaningful compromise unlikely. 

Is A Fiscal Cliff Resolution Likely? 

We now think that January 1, 2013 will arrive without any legislative action. 

There is simply no reason to believe that the two sides will come anywhere close to a meaningful resolution during the holiday season.  

President Obama will likely even make statements that being with his family is more important at Christmas time than being at the office. Such a statement would resonant with a lot of Americans, particularly those ignorant of the debt situation. 

That means any legislative action will likely be retroactive to the beginning of the year. 

Nothing is more frustrating to the economy than retroactive tax legislation, but that now seems to be the most likely outcome, if one is optimistic. 

A pessimistic view is that once over the fiscal cliff, a political blaming game will occur, but both sides will allow the new tax revenues to help offset deficit spending, instead of enacting spending cuts. 

Ironically, this would drive the economy into a recession, as forecast by the Congressional Budget Office (CBO), but cut the deficit for 2013 in half. 

Inaction and avoidance of serious problems has become the hallmark of Congressional and Presidential behavior in recent years.  

The Budget Control Act of 2011 is the best example, but is likely to only be the first of pseudo-serious attempts to control the budget. 

After all, the Budget Control Act contained a requirement that Congress vote upon a Balanced Budget Amendment to the Constitution, an act which never happened. 

We fear that a serious shift has occurred in Washington: a shift towards managing public impressions instead of dealing with serious issues. 

If such posturing becomes the norm with respect to the fiscal cliff and debt issues, we are not likely to see any serious attempt at dealing with issue in the foreseeable future. 

After all, postponing serious action at financial discipline has been a hallmark of Washington for years. 

In fact, if the Mayans were around to explain why the world hasn’t ended on this appointed apocalypse day, they might say something such as “what do you mean, it didn’t happen? The beginning of the end has now started.” 

The Uncertain Future Of Going Over The Cliff

The future of taxation in the United States is now completely unpredictable.  

There could not be a more difficult economic environment for business planners.  

Who hires or makes plans for the coming year (just 10 days away), without knowing how they will be taxed? 

What Washington doesn’t realize is how their inaction causes inaction on the part of business leaders, which slows the economy. 

No matter how you look at the situation, it seems the most likely scenario is that the US actually goes over the "fiscal cliff." 

Following that will come the even more difficult task of predicting what happens next. 

Comments may be emailed to the author, Robert V. Green, at aheadofthecurve@briefing.com