The paradox of a US debt ceiling deal is that it could be bad for markets and the economy. Not as bad as a US default, obviously, but bad nevertheless.

A further paradox is that bad may be just what the doctor ordered for bubbly equities and an economy which, thanks to ongoing strength in the services sector, refuses to roll over consistent with the Fed’s efforts to curb demand.

The bear case for risk assets from a debt ceiling agreement is well-worn territory by now: A deluge of bill issuance could conspire with a host of other factors to drain liquidity, creating a severe headwind.

Here’s Nomura’s Charlie McElligott recapping the main points of the liquidity drain dynamic:

1. TGA rebuild of upwards of $1.2 trillion and ~$500 billion to $600 billion almost immediately into Q3 finally supercharges a long-too-sleepy QT
2. The flight of deposits into money market funds (then sitting in RRP) continues in the background with Fed funds remaining “higher for longer”
3. A further drawdown in consumer and corporate “excess savings” from the pandemic era
4. The expiration of the student loan moratorium after June
5. Dynamics at play in Europe, with a substantial TLTRO repayment due and APP cessation of reinvestments in July

There are some potential mitigating factors, ranging from the relatively esoteric (Treasury can tailor issuance such that the bill tsunami is attractive to RRP participants) to the pedestrian (there’s lot of cash on the sidelines waiting to deploy).

But if any liquidity drain were to bleed equities’ joie de vivre, it wouldn’t be the worst thing in the world. After all, higher stocks means a rekindled wealth effect, which can mean more spending into the too-hot services sector, “where the inflation lives.”

Along the same lines, elements of the GOP’s “very stable genius” proposal would likely brake growth and undercut a red-hot labor market blamed for much of the core inflation impulse.

According to Bloomberg Economics, for example, Republicans’ “Limit, Save, Grow Act” could mean the economy doesn’t “grow” by nearly as much as it might’ve otherwise (or, if you expect a recession, the bill could make the downturn worse). It could also “limit” the labor market such that nearly 600,000 people lose a job. The tragic irony is that such an outcome could “save” the economy from a prolonged bout with runaway price growth. So, “limit,” “save” and “grow.” Don’t call it false advertising!

If you’re a Republican, the bet (probably) is that any recession in 2024 would be blamed on the White House, while any concurrent decline in inflation could be pitched as a product of GOP efforts to restore fiscal “discipline.”