The new Congress and the Obama Administration are in the early stages of determining each other's position on federal spending and taxes for this fiscal year and for 2012. Neither side has yet obtained an advantage in the early skirmishes, nor decided to precipitate a confrontation over their policy disagreements. So far, all parties have agreed to avoid a shutdown of noncritical federal functions by passing a short-term Continuing Resolution that funded the government for another two weeks.
The track record in prior budget battles years suggests that we can expect enactment of a series of further short-term extensions while attempts continue to reach a global settlement. The situation could become more complicated, however, if the current impasse is not resolved before treasury reaches the limit on its statutory authority to borrow to finance our national deficit. The debt ceiling is looming just over the horizon. Depending on its skill in cash-flow management, treasury likely will reach the debt ceiling in late May or early June, once it has spent the wave of tax receipts that are due on April 15th. If the political deadlock were to prevent Congress from increasing treasury's borrowing capacity, we would face a unique situation -- a short term national liquidity crisis caused, not by the markets, but by a failure of the political system.