After Obligatory Blazing Saddles Reenactment, US Decides Not To Blow Up World With Titanic Debt Default

The debt ceiling: The quintessential example of setting the bar laughably low and then celebrating when the government clears it.

“I am pleased to announce that a deal has been struck with Senate Majority Leader Mitch McConnell, Senate Minority Leader Chuck Schumer, Speaker of the House Nancy Pelosi, and House Minority Leader Kevin McCarthy – on a two-year Budget and Debt Ceiling, with no poison pills”, Donald Trump said on Twitter, pretending to understand something he very likely knows little, if anything, about.

“This was a real compromise in order to give another big victory to our Great Military and Vets!”, he went on to digitally shout.

If there’s anything notable about this it’s that it got done expeditiously, or what counts as expeditiously when it comes to this recurring farce. Steve Mnuchin started resorting to extraordinary measures to meet the government’s obligations in March, and began aggressively lobbying for a deal with Pelosi this month in order to ensure the US didn’t default before Congress gets back from vacation.

Of course, the idea of the US government defaulting is so mind-bogglingly ridiculous that one struggles to comprehend why it is markets are periodically subjected to this charade. This is the worst kind of self-inflicted crisis: Completely avoidable by virtue of being tied to a self-imposed constraint and potentially catastrophic.

Everyone knows a US default would be a veritable nightmare for markets. But the reputational damage would arguably be worse than the market fallout, because you have to be unfathomably inept at governing to drive the issuer of the world’s reserve currency into default.

This is one of those debates that’s best had in jest, because trying to have a serious conversation about it is insulting to all parties involved and is conducive to driving sane men crazy.

The US government cannot “default”. All arguments about fiscal profligacy and ballooning deficits aside, the concept of a literal US “default” doesn’t make any sense. It cannot happen. The only way the US government can “default” is in a technical sense, where that means lawmakers figuratively pull out a pistol and blow Uncle Sam’s head off for absolutely no reason other than to spite the opposing party, although even that is a nonsensical excuse because when it comes to the full faith and credit of the US government, everyone is by definition on the same side.

Yet every so often (too often), the government puts on this absurd ballet and lawmakers pretend as though there’s some alternative that involves driving the car off a cliff with everybody still in it. Eventually, once everyone who wants a shot at acting out the hostage scene from Blazing Saddles has had their turn, a deal gets done and that’s the end of it until the next time.

And so it was on Monday. The agreement takes the risk of a US default off the table and will nix automatic cuts which had threatened to lower spending by $55 billion and military outlays by $71 billion compared to FY2019.

As we wrote in February, markets have become somewhat numb to recurring debt ceiling shenanigans. Brinksmanship around the issue is now a fixture of American politics and there was every reason to believe this time would be no different, especially considering Trump and Congressional leaders on both sides of the aisle were keen to avoid the kind of lengthy feud that might rankle markets and further undermine America’s perceived creditworthiness at a time when unnecessary fiscal largesse is ballooning the deficit.

Under the new deal, the annual deficit will rise above $1 trillion next year.

“It’s pretty clear that both houses of Congress and both parties have become big spenders, and Congress is no longer concerned about the extent of the budget deficits or the debt they add”, David McIntosh, president of the Club for Growth, told The New York Times, for an article that underscores the irony in Mick Mulvaney being a part of an administration which has shown very little regard for the kind of belt-tightening he made his name promoting.

“The deal is a coup de grâce for the Budget Control Act of 2011, which President Obama signed into law after House Republicans, led by the current acting White House chief of staff, Mick Mulvaney, pushed the government to the brink of defaulting on its debt”, the Times notes, adding that the law was “once seen as Republicans’ crowning achievement in the Obama era”.

Trump’s initial comments about the deal did not include any acknowledgement of the extent to which more red ink has just been spilled in D.C. on his watch. So much for GOP orthodoxy.

“Both sides can claim victories, though neither got everything they put on the table at the outset of negotiations”, Bloomberg writes, recapping. “It would raise the current budget caps by $320 billion over two years, $30 billion less than Democrats sought [while] Trump would get only about half of the $150 billion in savings” he was after.

The Committee for a Responsible Federal Budget isn’t amused. “It appears that Congress and the president have just given up on their jobs”, the committee’s president, Maya MacGuineas, said in a statement. “[This] may end up being the worst budget agreement in our nation’s history”, she added. The committee’s full statement is below.

The House needs to pass the deal this week before the six-week recess, and the Senate next week.

While the agreement means the Titanic/ iceberg scenario of a US default is officially averted, another government shutdown is still possible on October 1, the deadline for lawmakers to decide how to allocate the money.

Speaking Friday about the relative merits of risking a default in order to secure political leverage, Trump said he “can’t imagine anybody ever even thinking of using the debt ceiling as a negotiating wedge”. That, coming from a man whose use of strategic bankruptcy is legendary and who held the government hostage for 35 days earlier this year in a bungled effort to extort funds for a vanity project on the southern border.

Now, who’s looking forward to September?

Full statement from the Committee for a Responsible Federal Budget

For Immediate Release

According to press reports, Congress and the President are close to a deal that would lift discretionary spending caps by $320 billion over the next two years. Depending on the details, this increase could add about $2 trillion to projected debt levels over the next decade, yet the agreement is reported to include less than $80 billion in offsets. The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:

As we understand it, this agreement is a total abdication of fiscal responsibility by Congress and the President. It may end up being the worst budget agreement in our nation’s history, proposed at a time when our fiscal conditions are already precarious.

If this deal passes, President Trump will have increased discretionary spending by as much as 22 percent over his first term, and enshrine trillion-dollar deficits into law.

Members of Congress should cancel their summer recess and return to the negotiating table for a better deal. If they don’t, those who support this deal should hang their heads in total shame as they bolt town. This deal would amount to nothing short of fiscal sabotage.

President Trump should reject this plan and honor his words from last year after signing the 2018 omnibus bill, when he said he would “never sign another bill like this again.”

There was a time when Republicans insisted on a dollar of spending cuts for every dollar increase in the debt limit. It’s hard to believe they are now considering the opposite — attaching $2 trillion of spending increases to a similar-sized debt limit hike.