Wednesday, May 24, 2023

It’s crunch time for the debt ceiling

The main sticking point: government spending.

President Biden and Speaker McCarthy
Drew Angerer/Getty Images

By Neal Freyman

May 22, 2023

It’s understandable if you haven’t been following negotiations around the debt ceiling—it is “negotiations around the debt ceiling,” after all.

But it might be time to start paying attention, considering that the clock for the US defaulting on its debts is getting dangerously close to midnight. Treasury Secretary Janet Yellen reiterated yesterday that the US likely wouldn’t be able to pay all of its bills beginning next Thursday, June 1, if Congress doesn’t raise the debt ceiling from its current $31.4 trillion level by then.

What would happen? No one is quite sure…since this has never happened before. But finance experts are sure it will be extremely damaging, with the potential consequences ranging from “guaranteed recession” to “global financial market meltdown.” The size of the blast radius depends on how long a default would last, the NYT reported.

How are negotiations going?

Not great, Bob. Despite the appearance of some progress last week, the White House and Republicans remain far apart on an agreement to raise the debt limit (though House Speaker Kevin McCarthy said he and President Biden will meet again today).

The main sticking point: government spending.
  • Republicans want a debt ceiling increase paired with a decrease in nondefense federal spending, including cuts to social services.
  • Democrats have accused Republicans of cynically pushing the US to the financial brink to force through their cost-cutting agenda. Yesterday, Biden said the GOP’s proposal would put “food assistance at risk for nearly 1 million Americans,” calling it “extreme” and “unacceptable.”
The White House offered to freeze domestic and defense spending next year as a concession to Republicans, but they rejected that offer, according to the Washington Post. The GOP wants more than a freeze—it wants a reduction in nonmilitary spending.

The view from Wall Street

JPMorgan CEO Jamie Dimon said last week the US “probably” won’t default, but he’s assembled a “war room” of leaders who will begin to meet daily to plan contingencies just in case.

[ IOW, Wall Street is thinking that the Politicians will "wayang", but ultimately they know what needs to be done, and will do what needs to be done, after they have extracted all the drama and political theatre they can from it.]

Investors seem to agree with Dimon that the bickering politicians will probably work out a solution before the deadline. The implied probability of a default in the credit default swaps market was 3.6% on Friday, compared to a peak of 6.9% during the debt ceiling standoff in 2011.

[Another way of looking at it is that Investors are betting politicians won't be stupid. BUT... pride. And these are US Politicians! You cannot be sure of the depths of their stupidity or the peaks of their pride. BUT... on the other hand, it is Kevin McCarthy... Stupid enough, or just stupid enough?]

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