Chris Krueger of Guggenheim Securities today has an excellent piece on how the sequester might be resolved. A few takeaways:
1. March 1 is a soft deadline for the sequester; the real cliff is the March 27 deadline for a new continuing resolution (CR) funding the government for the remainder of the year (or, more likely, Friday March 22 so that the congressional Easter recess isn’t disturbed).
2. The sequester is a slow chokehold, but public discontent is likely to ratchet up sharply, forcing a deal by end March.
3. There are three central scenarios for fiscal year 2013 in play: (i) using gimmicks and back-loaded cuts to pay down the sequester, as we did for two months in the January 2 fiscal cliff deal; (ii) a modified CR that allows more flexibility in implementing cuts and possibly reduces them; (iii) a “fail-safe” option that leaves cuts in place but provides flexibility in their application.
4. The deal could cover 1 to 2 months or the rest of the fiscal year. Chris sees a short-term solution as more likely because the price tag is smaller.
My problem with a 1 to 2 month solution is that it involves us in a dangerous game of leapfrog. Congress made a good decision in January when they passed a bill temporarily suspending the debt limit. By putting the debt limit behind other cliffs (sequester, CR, fiscal year 2014 budget resolutions), it reduced the risk of a catastrophic mistake on the debt limit and shifted the fight to sounder ground. The idea was that these other cliffs would produce sufficient savings to justify a longer-term debt limit extension. A 1 to 2 month sequester punt, if followed by a short term CR (on the same logic that it’s the cheaper and easier deal), leapfrogs the debt limit to the front lines of our budget fight, again. I worry how many times we can navigate showdowns where the hostage is the government’s credibility and capacity to pay its obligations.
More broadly, at some point we need an exit strategy from the repeated cliffs and kicking of the can. Absent a grand bargain that is increasing unlikely, deficit reduction will only stabilize the debt until the middle of the decade, after which demographics and higher interest rates make the debt rise again. But given that, it would be better to have a deal soon that gives each side some of what they want, and a strategy that defuses the sense of crisis for a while. Better to save our energy for immigration, gun control or other important priorities…before the can kicks back.
This piece is cross-posted from Macro and Markets with permission.