Image: Dollar bills floating over U.S. Capitol © Corbis

Après le deluge?

It may not seem like it this week, but the current budget and debt-ceiling crisis in Washington will end -- and probably somewhat short of financial Armageddon.

First, of course, we’ll have to listen to endless self-serving statements from politicians all seeking to portray themselves as the saviors of all that is good. We’ll have to struggle though days when markets sell off on fears of a U.S. default, and days when markets rally on a belief that even U.S. politicians wouldn’t be so insane as to risk a default that could set off a financial crisis.

And we’ll go through most of this in the dark, since the folks in the U.S. government who normally pump out data on things like unemployment aren’t at work right now.

But this chaos will end. And if you’ve positioned your portfolio carefully you might even wind up making a buck or two out of this uncertainty.

Deciding what that positioning should be isn’t easy. The current uncertainty is very real, and while I believe the outcome will be something short of a U.S. default and a financial crisis, there’s no guarantee that the global financial system won’t go over a cliff.

If we wind up in another post-Lehman bankruptcy crisis, I don't know that any positioning short of a portfolio of nothing but cash and real assets (carefully hedged to minimize currency risk, of course) will wind up offering much safety. But since the positioning that I’m going to recommend here starts with a decent hunk of cash, you’ll at least have some shelter if everything starts to go south.

Let me start by outlining what I think is the most likely outcome in this budget/debt ceiling crisis and a likely schedule.

The end is not imminent

I could be wrong and we could see the resolution of the shutdown and debt-ceiling battles this week, but that’s not how I read the politics in Washington.

For example, on Sunday night I read what seemed to be hopeful headlines saying that three House Republicans with Tea Party links were showing signs of changing their positions.

Changing? Well, yes. Changing in a way that moves this crisis toward a solution? No.

Republican Reps. Blake Farenthold of Texas, Doug Lamborn of Colorado, and Dennis Ross of Florida all indicated that they would back an agreement to end the government shutdown and raise the debt ceiling even if the agreement didn’t include defunding or delaying Obamacare. Of course, the agreement would have to include major changes to Medicare and Social Security.

This isn’t movement toward the end of the crisis.

I don’t think the politics of the Republican Party allow for a solution to the budget impasse until the country has stepped over the October deadline from Treasury. And even then, I think it’s going to take something like the inability to pay the big government obligations due on Nov. 1 without some drastic juggling to push this crisis to a solution.

Not enough fear

I’ve got three reasons for thinking this.

First, the pain of a government shutdown just isn’t immediate enough to change many votes in the House of Representatives. Sure, the national parks are closed and Head Start is sending kids home, but I don’t think that has enough of an impact to change votes in the House. And in the last few days we’ve even seen civilian workers at the Defense Department and workers at some defense contractors headed back to work. This kind of shutdown does seem to justify statements by conservative politicians and voters that the shutdown is just not that big a deal.

image: Jim Jubak

Jim Jubak

Second, the Republican House leadership might be willing to -- eventually -- pay the political price for alienating the most conservative members of the House and the party’s political base by allowing a vote by Democrats in the House along with 20 or so Republicans to end the crisis. But it isn’t likely to allow a vote on a clean continuing resolution to fund the government and then come back in two weeks to allow a clean vote on the debt ceiling. One big package to resolve both crises, yes, but only after the debt-ceiling deadline has put so much pressure on Washington that politicians can’t not act any longer.

Third, not enough people in Washington or on Wall Street really believe in the Treasury’s Oct. 17 deadline for raising the debt ceiling. The calculations on Wall Street are that Treasury really has until Nov. 1, when there’s a big set of payments due. And a significant number of politicians in Washington aren’t convinced that the cost of not raising the debt ceiling is all that great at any point.

So far, the very measured reaction from the U.S. financial markets isn’t putting much pressure on the financial community to press Washington for a solution or on politicians to head off the problem. To get to a solution, I think we need to see more fear on Wall Street -- and in global financial markets -- and lower prices for stocks and U.S. Treasurys.

So I think we’re going to have this crisis with us for a while, and I think it is going to have to get worse -- and particularly worse in its visible effect on the financial markets -- before we’ll see an end.