Politicians crack…hopefully
The lesson from all this is that politicians are quite prepared to inflict pain on the electorate and the economy for their own political ends – remember the potential for default is not down to America’s ability to borrow, but the desire of politicians at a specific point in time to permit that borrowing.
Eventually though, fearing the electoral consequences of inaction, we do see concessions made and an agreement forged. But this time, more than any over the past 30 years given the ideological differences involved, the brinkmanship could be even more extreme.
The best-case scenario is that politicians see sense with both sides prepared to work on a deal over the next few months. Government workers and bond-holders would get a little nervous about whether they would be paid, but concessions would be made by both sides and the debt ceiling raised in time.
Unfortunately, given the political backdrop this looks unlikely. Instead, we run the very real risk that nearly a million government workers go without pay for many weeks thanks to extreme brinkmanship. This will be financially challenging with households already struggling with the high cost of living, and could result in marked expenditure cuts. The political stalemate also has the potential to last much longer than previous episodes and we could see even deeper cuts to government spending and the prospect of default, which would be both economically damaging and have major financial market implications as outlined above.
There have been proposals made that could get around a deadlocked Congress, including the creative idea of the Treasury minting a trillion dollar platinum coin and immediately depositing this at the Federal Reserve, which would give the government the funds to keep spending. Another is the president invoking the 14th Amendment Right to pay the government’s obligations, thereby overriding the debt ceiling. However, President Biden has made it clear that this is not on the agenda and in any case, there could be legal challenges to both.
Nonetheless, pressure will mount on the president to change his mind if Congress can’t strike a deal and these seemingly outlandish scenarios move one step closer to reality.
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