The chicken game over the US debt ceiling has begun

The new Republican majority in the House of Representatives and the power demonstrated by the Trumpist “MAGA” and ultra-conservative factions of the House Freedom Caucus in forcing new Speaker Kevin McCarthy to agree to an exhaustive list of concessions as the price of their support for his Elevating this position, including committing to support deep government spending cuts, has significantly increased the risk of default.

The Biden administration insists it will not negotiate major spending cuts. It would say so, but politics in the US is so polarized, and so extreme some in the narrow Republican majority in the House of Representatives, that it’s conceivable that Republican demands will be so awkward that the White House will never agree to them.

“Financial Armageddon”

There are those in the party who want to demand a statutory balanced budget within a decade in exchange for a debt ceiling hike that would force massive trillion-dollar cuts in government spending on defense, medical care and social security, among other things.

Moody’s Analytics has estimated that an outage (which would be said to be “financial Armageddon”) would cost up to six million US jobs and up to $15 trillion in household wealth. But the flow-on effects in the US and worldwide are incalculable.

Low liquidity in bond markets, including the US market, could lead to a financial system seizure similar to what happened in March 2020 at the start of the panic. Back then, it took unprecedented action by the Federal Reserve Board to avert a collapse of the US system.

(Ironically, the Treasury Department’s inability to issue new debt should increase liquidity and offset the Fed’s “quantitative tightening,” or its monthly balance sheet contraction of $95 billion.)

McCarthy agreed with demands from his Conservative factions that a House member’s vote could trigger a vote to remove him as Speaker. That he was willing to make so many concessions to get the position suggests he will not agree to any compromise these factions do not support.

That has led to discussions of workarounds that would allow the White House to bypass the Conservatives and even Congress.

There have been talks between Democrats and moderate Republicans for a less ambitious/radical deal. It only takes six Republicans to support a compromise to clear the House of Representatives.

There has been talk of using a rarely used process known as a dismissal motion, whereby a bill can be taken out of committee (where Republicans might otherwise keep it pending default) and brought to the floor in the House Poll. This would require 218 votes, a majority in the House of Representatives.

However, this is considered a difficult and time-consuming process. It takes 30 legislative days, which is up to three calendar months, before it can be presented to Parliament.

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Also, moderate Republicans would be asking something significant in return for their support and the ire it would draw from other Republicans and their supporters, so there would still be spending concessions that the Biden administration adamantly refuses to make will.

An intriguing and radical idea that was floated in the past and investigated by the Obama White House and the Fed in the past has resurfaced.

There is nothing stopping the US Treasury from minting a “platinum” or trillion dollar coin and depositing it with the Fed, which would then credit the Treasury account with $1 trillion. Debt ceiling resolved.

However, Yellen has called the concept a gimmick, the Fed’s Jerome Powell hates the idea and may refuse to accept the coin, nor is there any guarantee that – even if accepted by the Fed – a measure will look so obvious Desperation is borne and borne Political dysfunction would not produce consequences similar to default.

As the days and months tick by and the X-date approaches, markets will take the prospect of an actual US default increasingly seriously. The process will clearly go to the edge or even beyond.

The chicken game that politicians will be playing in the US over the next few months will have consequences, potentially profound, and not just for the US.

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https://www.smh.com.au/business/markets/the-game-of-chicken-over-the-us-debt-ceiling-has-begun-20230119-p5cdpt.html?ref=rss&utm_medium=rss&utm_source=rss_business The chicken game over the US debt ceiling has begun

Brian Lowry

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