Joe Biden described himself as a “congenital optimist” while speaking to reporters about the debt ceiling ahead of a make or break week for a standoff with the potential to turn a calm market into a melee.
Biden is set to meet with Kevin McCarthy again on Tuesday, and staff-level negotiations over the weekend were “engaged, serious and constructive,” according to Lael Brainard, who weighed in during a CBS interview.
It’s important that market participants (and voters) understand the nature of this charade, and for once I’m not referring to any philosophical debate about what is and isn’t “debt” or related brain teasers around the self-evidently ridiculous notion that the issuer of the only universally-acknowledged payment method for “all debts, public and private” can somehow be “broke” or fiscally bereft.
Rather, I’m referring on Monday to the simple fact that at this juncture, the stalemate is actually just about saving face. Although Biden and McCarthy surely don’t agree about much when it comes to the budget, the White House is engaged in discussions with the House GOP about points of potential agreement, and some of those points are at least related to Republicans’ debt ceiling demands.
This is an oversimplification, but the biggest hurdle to a debt ceiling deal relates to optics. The White House wants to say budget negotiations are separate from the debt limit. McCarthy wants to tie the two together. That’s where the tension lies. So, there’s a very real sense in which the fate of entitlement payments, troop salaries and, according to alarmists, the entire financial universe, hinges on the pride of two men. History is replete with examples of disasters born of men’s pride.
To be sure, this is a little more than pride for McCarthy. If he can’t present any agreement as a package deal, his right-most flank in Congress could try to strip him of the gavel. Unfortunately, many in the GOP have demonstrated a willingness to push the “partisanship over principle” envelope to unfathomable extremes, so it’s not out of the question that McCarthy, blackmailed by the handful of fervent kamikazes who turned his speakership vote into a circus in January, would risk a default.
By contrast, how any deal is presented isn’t existential for Biden. Most Americans wouldn’t know the difference between a “clean” debt ceiling bill that’s passed alongside a budget compromise and one that’s packaged with a spending agreement, and even if some voters did recognize the distinction, his approval rating is so low that it scarcely matters. Just based on the numbers, Biden’s support has narrowed such that it’s mostly concentrated among voters inclined to approve of his job performance regardless. So the debt ceiling risk seems asymmetric. “Folding,” where that just means pairing a spending compromise with a debt limit deal, isn’t going to cost Biden, but a default probably would. In the final analysis, he doesn’t generally resort to deflection, even as all politicians’ first instinct is to blame somebody else for crises. To Biden’s credit, he’s a “buck stops here” kinda president.
With that in mind, note that not everyone believes a default would invariably lead to a stronger dollar and a Treasury rally. Some (admittedly a small minority) worry that if the US were to start missing payments (any payments), the “buck stops here.”
“We have considered the argument that the US dollar would appreciate in such a scenario, as part of a risk-off move into haven assets [but] we are not convinced,” BNY Mellon’s John Velis said Monday. “Borrowing premia for the government and most issuers of corporate debt would rise quickly, we think, and US bonds would not necessarily enjoy a safe-haven bid if the full faith and credit of the United States of America were no longer assured.”
I don’t agree with the implicit market call, but I do agree with the unspoken contention that unlike previous debt ceiling standoffs, the “full faith and credit” pledge actually is on the line this time. America has an institutional credibility crisis. When considered with the concerns of some autocratic locales about the West’s willingness to seize and otherwise freeze Treasurys, G7 claims and other reserves held as “inside money,” you could argue that some nations are looking for excuses to get out of Treasurys, not into them. I don’t buy that, but it’s a popular argument.
“We don’t think the USD would benefit from rising yields either, and indeed would likely drop as investors shun US assets caught up in the selloff,” Velis went on to say, adding that “the loss of US financial credibility would clearly be dollar-negative.”
Goldman doubts it. “Discussions around the debt ceiling often turn to the de-dollarization debate. While there may be some validity to that linkage, it does not change that there is currently no alternative to the dollar’s global role, and this cannot change quickly,” the bank’s Kamakshya Trivedi remarked. “We do not expect this impasse to have a material near-term impact on reserve management.”
That’s my position as well, but to reiterate, this time (i.e., this debt ceiling debate) does feel different. I’d argue it’s best conceptualized not as another episode in an absurd partisan soap opera, but as a microcosm of a broader societal disintegration.
“I think, Margaret, it is helpful to just lift up and talk a little bit about what is at stake here,” Brainard told CBS’s Margaret Brennan. “So when I talk to CEOs, to business leaders around the country, they tell me things are actually going very well, but their biggest concern is that Congress might fail to prevent default, and that that would be catastrophic,” she said. “It would lead to higher borrowing costs for cars, for mortgages, for small businesses [and] even for the US government.”
This time around, it might lead to worse outcomes than that. “The world’s reserve currency, whose position as such in the global financial architecture had come under question, would suffer a blow,” BNY Mellon’s Velis warned. “We have not been big believers that the dollar’s dominance was under significant threat, but crossing the x-date could prove to be an inflection point.”
in recent times (pick your horizon), has there been much beyond ‘optics’ and ‘gestures’ in US political domain? Even when some try to govern, optics and gestures take forefront (or, capture the media’s attention, and then our eyeballs)
Biden and the previous Congress 20-22 passed massive legislation on a broad array of topics. They were one of the most successful legislative bodies in the history of the country if we define success by the objective measure of volume of legislation.
We can also look at the success of some short run effects (though judgement of long run effects are still pending). It is the fiscal policy put forward by the administration and the last Congress that has allowed the economy to remain strong while everyone expected the entire system to crash due to the Fed’s tightening. Further, this economic strength was resulted in an increase in the velocity of money, meaning the real economy is growing, not some false optic trickle-down growth “trickle” driven by monetary policy largesse.
Unfortunately, the Biden administration is terrible at messaging and there are billions of dollars of assets focused on lying about our present such that many (even intelligent people) can not differentiate the lies from the truths.
I take your point, but I think it’s a stretch to suggest (regardless of your definition) that the last Congress was the “most successful legislative body in the history of the country.” Also, we’ve learned (and I wish this wasn’t true, but it is) that it’s very hard to get hot nominal growth without inflation. In fact, there’s a sense in which the idea of such a conjuncture doesn’t make much sense. Personally, I prefer an argument that says Main Street suffered severely during The Great Moderation, and particularly post-GFC, and that as such, maybe 3.5% or even 4% inflation is something we should try given the potential for higher wages, more bargaining power for workers, a more vibrant economy and so on. But suggesting that this administration has been a “success,” on any front, is a tenuous proposition. It’s surely better than the alternative on offer in 2020, which was soft autocracy and everything that goes along with it, but that’s a pretty low bar.
Can you spell “depression”? I would anticipate a drop in the Dow of over 5,000 points in one day and market rates for trading treasuries starting at over 25%. The death before dishonor politicians are financially illiterate, and in many republican cases, illiterate literally. The lowest common denominator has taken control and is determined to take us all down if they can’t win. Compromise has been taken out of the dictionary.
I agree with your last three sentences, but your prediction about Treasury yields isn’t possible. There’s no chance of that. The odds of 1-handle 10s are infinitely greater than 10-handle 10s. 20-handle 10s isn’t something that would be permitted under these sorts of circumstances. (You could see something like that in a nightmare macro scenario where inflation spiraled to 15% and the Fed had to raise rates commensurately, but there’s no chance at all of 20-handle 10s overnight based on some accident in D.C. The Fed wouldn’t allow it.)
I hate to say this, but compromise was never in the dictionary. The history of this myth shows us that the only time both sides of the aisle are able to “compromise” is when money, goods, or useful promises are exchanged. For many years my wife and I played a fun game called the “St Valentine’s Day Massacre” which involved a proxy sports car rally conducted on the pages of each current year’s Rand McNally US road atlas. To win required meticulous tracing of a route through most of the US and a good bit of Canada to find and document 120 check points. While following these routes across the map one can easily see what has supported so-called compromise. Every state in the union except one, Iowa, houses at least one major government installation. From the names of these military bases, parks, major offices, etc one can easily tell which senators and congressman yielded major power at some point in time and had to be “bought off.” Pork barrel spending, while being the constant target of ridiculous rhetoric, is the grease that creates compromise. The unwritten rule is that every sitting member of Congress must be given something to take back home at election time. This horse trading is essential. The last time we broke that rule more people died than in all our other wars combined. The clowns making useless demands in DC now will start our destruction if they don’t make serious changes.
In addition to the face-saving, the negotiations are also about setting precedents. If the Republican Party is successful in its brinksmanship this time around, similar negotiations will likely become an annual practice whenever the Administration and House of Representatives are controlled by different parties in the future. The risk of default going forward will rise, and an actual default at a later date will become much more probable.
I don’t think we’ll get to default on Treasuries, because before that we’ll get to suspension of SSS, SSI, Medicare, VA, etc, benefits and before that we’ll get to the sort of partial federal government shutdown that has ended prior budget and debt ceiling standoffs.
We’ve been here before. 2013 most recently. The Administration has many levers (things to shut down) to ratchet up pressure on Congress. House Dems only need a few Republicans to cave, or several to abstain. Biden was VP then, knows what levers to pull, and hasn’t even started pulling.
For reference, the 2013 federal govt shutdown was one of the shorter ones. This could last a month or months.
https://en.wikipedia.org/wiki/2013_United_States_federal_government_shutdown
H I can’t decide if the MAGA bozos in the house are going to do it but the apparent reemergence of media evil genius Trump advocating for a default makes me think the odds are higher. Do you agree with this as a real factor?
Every extra day of this puts off a Trump federal indictment, which further puts off court dates.