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Debt ceiling drama is the last thing America’s economy needs

If Congress doesn’t raise the debt ceiling, the federal government will likely run out of money by October or November, according to the Congressional Budget Office. Senate minority leader Mitch McConnell is already promising Republicans will not vote to raise the federal credit limit – although doing so risks a default that would weigh on the economy.

“The last thing the economy needs is an artificial crisis,” said Joe Brusuelas, RSM’s chief economist. “The risk is that the political polarization in Washington is so strong that politicians who should know better toss words like ‘default’ around.”

Failure would be catastrophic. US debt is considered to be the safest security in the world and is the benchmark for measuring all other risks. Even a near miss could drive interest rates higher and the cost of borrowing on everything from car loans to mortgages. The markets would fall.

“Few Washington political affairs have such a destructive economic capability,” wrote Chris Krueger, executive director of the Cowen Washington Research Group, in a customer note on Thursday.

“Cascading Disaster”

At a hearing in May JPMorgan Chase (JPM) CEO Jamie Dimon urged lawmakers not to even think about going that route again. An actual default, Dimon said, “could cause an instant, literally cascading, disaster of unbelievable proportions, damaging America for 100 years.”

Brusuelas repeated this feeling. “If you want chaos in the financial markets and a repeat of the global financial crisis, this would be the quickest route to hell,” he said. “The adults in the room must take control.”

But this week McConnell signaled a brewing battle over the debt ceiling.

“I can’t imagine after what we’ve seen there will be a single Republican vote to raise the debt ceiling,” the Senate minority leader said in an interview with Punchbowl News published on Wednesday.

President Joe Biden responded by pointing out that Republicans would have no problem increasing the credit limit if a Republican was in the White House.

“You know, for the past four years they have only increased the debt ceiling,” Biden told reporters.

In 2019, Congress voted to suspend the debt ceiling altogether, but that two-year suspension expires later this month.

The Treasury Department can take extraordinary steps to keep the lights on – but not for long. These measures will most likely be exhausted in October or November, the bipartisan CBO estimated on Wednesday.

“We have been here before”

This situation adds to the numerous question marks the U.S. economy faces as rising inflation cools and the delta-driven summer surge in Covid-19 cases diminishes.

“The timing of the debt ceiling deadline and the intersection of the subject with the broader budget debate are likely to create heightened uncertainty in late September when Congress needs to expand spending powers,” Goldman Sachs economists wrote in a report sent to clients Wednesday night.

Wall Street seems unimpressed, at least for the time being.

Despite Monday’s slump, the US stock market remains within striking distance of all-time highs. There is no sign of concern in the treasury market either.The Covid recession is officially over and it was the shortest on record

“We’ve been here before,” wrote Guy LeBas, chief fixed income strategist at Janney Capital Markets, in an email.

LeBas said investors would only worry if there was a “real risk” that the US Treasury Department would fail to make payments on due Treasury bills. And he added that it would likely take three to four months after the emergency money operations began, suggesting that “Congress has plenty of time” to raise the debt ceiling.

The final game

Goldman Sachs economists expect Democrats in Congress to combine the debt ceiling vote with a mandatory spending bill, a daring move that has been carried out in the past.

“Although Senate Republican leader McConnell has indicated that Republicans will not vote for the debt ceiling suspension, they could ultimately support it if the alternative were against the spending agency, which would lead to a government shutdown,” wrote economists von Goldman Sachs in the notice.

Ed Mills, Washington political analyst at Raymond James, doubts that this will be resolved through bipartisanism. He predicts that the Democrats will raise the debt ceiling through a budget reconciliation as part of a large spending program that only requires a simple majority.

“For me this has always been the final,” said Mills.

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While many see a way to avoid a debt ceiling disaster, the absurdity itself only adds to concerns about the political health of the United States.

Fitch Ratings warned earlier this month that America’s perfect credit could be overturned in part due to worsening political polarization and the ongoing attack on democracy by the January 6 uprising.

Fitch concluded that governance in the United States is a “weakness” – and another stalemate over the debt ceiling will only cement his thinking.

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