This week the United States Treasury activated so-called extraordinary measures after the US hit the debt ceiling.
Treasury Secretary Janet Yellen says the move will allow the US to keep the lights on until June 5 – so that the government can continue paying pensions, interest on its bond obligations, and military salaries. But these ‘extraordinary measures’ are nothing more than a band-aid, as it will ultimately be up to Congress to agree on how to raise the debt ceiling. Failure to do so, or find creative ways to remain beneath the $31.4 trillion debt limit – would mean default, financial crisis, and at minimum – a deep recession.
Now, newly minted House Speaker Kevin McCarthy (R-CA) – who made a boatload of concessions to GOP holdouts in exchange for their votes – has been pressing for Democrats to come to the bargaining table.
Democrats, meanwhile, have been giving McCarthy the cold shoulder, and have characterized several ideas from the Republicans as nonstarters, The Hill reports.
“Republicans are creating a crisis that need not exist,” said Rep. Brendan Boyle (D-PA), top Democrat on the House Budget Committee, accusing the GOP of playing “political games.”
The impasse has heightened public concern in recent days, particularly as the Treasury Department has begun what it calls “extraordinary measures” to keep the U.S. government from defaulting on its debt.
The standoff comes as House Republicans have ramped up calls to tie spending cuts to any bill raising or suspending the debt limit — legislation that caps how much outstanding national debt the government can hold to fulfill its financial duties. Democrats, by contrast, have instead insisted on a clean bill to address the debt ceiling. -The Hill
Democrats, meanwhile, are demanding a “clean” bill – which isn’t tied to any spending cuts.
As Politico notes, a debt ceiling battle right now would be ‘especially bad’ this year.
For one, the place where that debt is traded, the Treasury market, has already been under strain because of the Federal Reserve’s relentless interest-rate-hiking campaign. Rising rates make even recent lower-rated debt less valuable, so there are fewer buyers right now. Also, the market relies on a small number of large dealers to intermediate trading for a huge volume of debt, and they can only hold a finite amount of assets on their books at any one time.
These and other factors mean trading and pricing aren’t as smooth as they would ideally be, so U.S. officials are trying to reform how the market is structured to make it work better.
Since the Fed is still engaged in its battle against high inflation, it might be more hesitant to intervene and buy Treasury bonds to prop up the market, at least as dramatically as it otherwise would. That’s because buying bonds would run at cross-purposes with its efforts to slow down the economy.
According to John Fagan, who led the Treasury Department’s markets room from 2014 to 2018, the Fed is ‘battle-tested,’ but “that’s the only factor I can think of that would be more favorable than last time around.” Otherwise, “Everything else looks worse.”
According to Fagan, if the US does go past the “X-date” when it can’t meet its obligations, liquidity problems could get seriously worse.
The White House has of course sided with Democrats, and has called for Congress to confront the debt ceiling “without conditions.”
“It is essential for Congress to recognize that dealing with the debt ceiling is their constitutional responsibility,” said White House press secretary Karine Jean-Pierre earlier this week.
The has set the stage for a spring budget battle
When the White House unveils its annual budget proposal in early March, Republicans will be able to use it as an opening bid for negotiations.
The last time this happened in 2021, Republicans and Democrats agreed to a short-term extension of the borrowing cap less than two weeks from default. Two months later, Congress finally approved a $2.5 trillion increase to the debt ceiling after the Treasury warned that it was about to breach the statutory limit on its ability to borrow.
That might not be so easy this time around – with McCarthy and the GOP largely in disarray, and Democrats – including Senate Majority Leader Chuck Schumer (D-NY) having so far rejected even the prospect of negotiations. That said, it’s entirely possible that Sen. Joe Manchin (D-WV) could demand that Democrats rein in some spending.
Another option for Congress to resolve the debt ceiling impasse would be a procedural tool known as the discharge petition – in which rank-and-file Republicans could advance legislation that McCarthy and other GOP leaders in the majority don’t support if they align themselves with Democrats.
But while the mechanism “can be used to address several different bottlenecks in the legislative process,” Molly Reynolds, a senior fellow in governance studies at the Brookings Institution, cautioned that “it’s not an especially elegant strategy.”
The process is arduous and politically fraught, given that it undercuts the authority of the House speaker and procedural control of the floor. Lawmakers would have to settle on a measure that has the support of enough Republicans and Democrats — and could secure 60 votes in the Senate — and send that measure to a committee. –NY Times
In other words – unlikely.
And that is what the markets are starting to price in with a ‘kink’ appearing in the T-Bill curve around June/July…
And more worrisome, US sovereign credit risk is spiking near record highs…
Finally, as Jeffrey Frankel opined this week, ‘this debt-ceiling fight may be different’: As Washington gears up for yet another partisan showdown over whether to raise the debt ceiling, with congressional Republicans seeking concessions from Democrats in exchange for their votes, many are understandably nonchalant about it. Americans feel they have seen this movie before, and the story usually ends with the bickering politicians reaching a last-minute compromise. So, no need to ring the alarm bells. But this reboot could have a different, tragic ending. In the 1955 movie Rebel Without a Cause, James Dean’s character survives a deadly game of “chicken” by jumping out of his car at the last moment while his rival miscalculates and drives off a California cliff. With the US economy barreling toward the cliff’s edge, it is clear that intransigent Republicans have no intention of hitting the brakes. This could mean a once-unthinkable US government default. Unfortunately, letting Republicans drive the US economy off a cliff may be President Joe Biden’s best option right now. But the US still has at least five months to jump out of the car… By then, hopefully, crashing securities markets, outraged beneficiaries, and shifting voter attitudes would finally persuade enough holdouts to raise the debt ceiling. In the meantime, we have no choice but to let this game of chicken play out.
Either way, this ‘game of chicken’ has a long way to go yet.