The new Republican majority in the House of Representatives has Washington and Wall Street bracing for a revival of brinkmanship over the nation’s statutory debt limit, raising fears that the fragile U.S. economy could be rattled by a calamitous self-inflicted wound.
For years, Republicans have sought to tie spending cuts or other concessions from Democrats to their votes to lift the borrowing cap, even if it means eroding the world’s faith that the United States will always pay its bills. Now, back in control of a chamber of Congress, Republicans are poised once again to leverage the debt limit to make fiscal demands of President Biden.
The fight over the debt limit is renewing debates about what the actual consequences would be if the United States were unable to borrow money to pay its bills, including what it owes to the bondholders who own U.S. Treasury debt and essentially provide a line of credit to the government.
Some Republicans argue that the ramifications of breaching the debt limit and defaulting are overblown. Democrats and the White House — along with a variety of economists and forecasters — warn of dire scenarios that include a shutdown of basic government functions, a hobbled public health system and a deep and painful financial crisis. [Continue reading…]
Markets might not show it yet, but there is growing concern among financial giants that the upcoming debt ceiling fight between conservative Republicans and the Biden administration poses a real threat to the economy.
For those like Elliot Hentov, head of policy research at State Street Global Advisors, it’s a realization that the incentives for a crisis are high, with no obvious scenario where conflicting sides will back down. Conservative GOP lawmakers who want spending cuts are emboldened after Kevin McCarthy’s speaker election, while Democrats and a number of moderate Republicans are resisting attempts to hold the U.S. debt limit hostage. The “X date” for when the federal government won’t be able to pay its bills is uncertain but is estimated to happen around the middle of the year.
It’s unlikely the U.S. will miss a debt payment, Hentov told MM. But he sees a real risk — unlike in past debt ceiling brawls — that the standoff will last so long that the Biden administration will be forced to use murky legal maneuvers to keep paying the government’s bills, casting uncertainty over a bedrock element of the global financial system. (The White House has said it’s not considering measures to go around Congress, like minting a $1 trillion coin or invoking the 14th Amendment.)
Hentov’s concern is that unexpected dominoes may fall like they did during September’s U.K. financial crisis, when a dramatic tax-cutting proposal by the Truss government triggered a hike in bond yields and blew up pension funds. [Continue reading…]