In an interview at University of Maryland’s Robert H. Smith School of Business, Executive-in-Residence of the Center for Financial Policy Bill Longbrake provided insight into the government’s debt imbalance and possible outcomes of the ensuing congressional deadline of March 4th to reach an agreement to continue funding the federal government.
The government is currently operating on a continuing resolution that will fund the government through March 4th. A lesser talked about issue beyond the short-term funding of the government is the parallel track of raising the debt ceiling. “The debt ceiling limits the amount of money the U.S. Treasury can borrow,” Longbrake explains. “We are very close to maxing out that limit right now. The current estimate is that the Treasury will run out of money in May or possibly early June,” Longbrake says.
He is not optimistic about an agreement between the House and Senate come March 4th, but he does not believe they will let the government shut down. “Very likely there will be a one to two week extension of the continuing resolution, and that process most likely will continue with a lot of discussion and a lot of arm-waving and so forth until the federal debt ceiling becomes binding.” He believes that a deal will eventually be struck between both chambers in May or early June that will include an extension of the continuing resolution along with raising the debt ceiling. He predicts that this resolution will also contain spending cuts, but not as significant as the $61 billion approved by the House.
In his February 2011 edition of the Longbrake Letter, he discusses the need to do more than just “tinker with discretionary spending”, but to overhaul the tax structure and reform entitlement programs. The sooner those matters are addressed seriously, the better, as unchecked escalation in the public debt could over the next several years destabilize U.S. financial markets and the economy. Longbrake is pessimistic about the Congress sufficiently tackling these longer-term issues in the next year or two. “I do not at this moment see a broad enough political consensus to deal with these very contentious matters.”
Nonetheless, he is hopeful that something might come of the current bi-partisan effort in the Senate to deal with tax reform and entitlements. His current expectation, however, is that the current funding issue will ultimately be resolved “with a lot of noise”, but efforts to deal with the other tough fiscal issues will fail. “Therefore,” Longbrake concludes, “the imbalances and the public debt will continue to be a problem that builds.”
In the full length interview, Longbrake also discusses speculative investments in China and discounts the threat of inflation in our economy.
The Center for Financial Policy was launched in November 2009 and develops thought leadership in financial policy that impacts corporate performance, capital allocation and the stability of the global financial system. Located in Washington, D.C., at the Smith’s School’s campus in the Ronald Reagan Building and International Trade Center, the center is well-situated to take a leadership role with its globally recognized faculty and its extensive relationships with key policymakers, practitioners and academics.
Eric Miller, MBA Candidate 2011, Center for Financial Policy