BOTH SIDES ARE BITTERLY DUG IN on extending the debt ceiling — so dug in that a catalyst will be required to break the logjam. Unfortunately, that catalyst probably will be very nervous markets, which will demand a deal later this fall.
TREASURY SECRETARY JANET YELLEN DID HER PART, attempting to scare the markets, writing in a Wall Street Journal op-ed this weekend that failure to act will lead to “widespread economic catastrophe.”
YELLEN WARNED this could lead to “millions of Americans strapped for cash,” with Social Security payments jeopardized, troops unpaid and the child tax credit suspended.
FOR THE MARKETS, SHE SAID, there could be a spike of interest rates, a steep drop in stock prices and an inability to make payments on car loans and credit card bills.
THE STRATEGY THUS APPEARS to be a scare campaign, pressuring Mitch McConnell and Republicans to cooperate on a debt ceiling hike, blaming them if the markets get nervous. Democrats need ten GOP votes in the Senate to break a filibuster and raise the debt ceiling; presently they have none.
THE TIMETABLE: Democrats probably won’t have a massive social spending bill ready for a vote by next Monday, as promised by House Speaker Nancy Pelosi. Perhaps more importantly, they will need to quickly pass a continuing resolution (CR), keeping the government open when the new fiscal year starts on Oct. 1.
A DEBT CEILING HIKE could be included in the CR, which also would contain hurricane relief. If the Republicans reject this package, there could be a federal government shutdown in less than two weeks.
THIS IS ALL ABOUT WHO GETS BLAMED for massive new spending. Republicans don’t want their fingerprints on raising the debt ceiling, even though they spent freely during the Trump years. Yet they want to stop Biden’s massive spending bills. Democrats want to blame the GOP for a shutdown or even a federal default.
THE POSTURING WILL CONTINUE for several more weeks — plenty of time for the financial markets and the public to tire of the Washington dysfunction on the debt ceiling, conflicting signals on tax hikes, threats from Joe Manchin, gloomy news from China, illegal immigration, Fed asset tapering, etc.
BOTTOM LINE: At some point the debt ceiling will get raised — after this crisis deepens. It always gets raised. But when the U.S. Treasury Secretary scares Americans about an “economic catastrophe” and warns that Social Security checks could be jeopardized, that threatens a significant crisis of confidence. A message to the Democrats: be careful what you wish for.
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