Running Out of Time as the Debt Ceiling Looms

by Greg Valliere, AGF Management Ltd.

THE GLACIAL PACE OF NEGOTIATIONS on an infrastructure deal is creating a logjam as Congress faces budget deadlines — including the expiration on July 31 of the debt ceiling, which the markets will have to watch.

MORE TALKS ON INFRASTRUCTURE are scheduled for this week, with President Biden facing a dilemma: should he accept a $1 trillion deal that probably could get through Congress by the end of July, or should he hold out for something far more expensive that could stall?

BIDEN KNOWS THE DEMOCRATS’ progressives want a huge bill, but it would encounter a Republican filibuster. So once again the focus is on the key Democrat, moderate Sen. Joe Manchin, who might waver on his opposition to filibuster reform. Manchin told the Washington Post this weekend that he might favor a 55 vote threshold, not the present 60 votes needed to break a filibuster.

THAT COULD MOVE THE NEEDLE on a $1 trillion bill, which the Democrats could reluctantly accept — and then they would push for an expensive social spending measure and tax hikes through the controversial reconciliation process, which requires only 51 votes.

THIS TORTUOUS AND MIND-NUMBING path could take several weeks, yet Congress is scheduled to leave town for about six weeks, starting in early August. The lack of time will become a major theme — the debt ceiling expires on July 31, with both parties fiercely dug in over what might be attached to an extension.

REPUBLICANS VIEW THE DEBT CEILING FIGHT as an opportunity to demand deep spending reductions, but precisely what they would cut is unclear. The GOP will blast runaway spending, while Democrats will claim Republicans would risk shutting down the government and defaulting on debt.

IN THE FINAL ANALYSIS, the debt ceiling will get raised; it always does at the last minute. And more spending will be approved just before the fiscal year ends on Sept. 1, with an extension probably lasting until the holidays, as usual.

TAG — YOU’RE IT: Every president in recent decades has faced a fight from the opposing party on extending the debt ceiling; it’s a time-consuming and petty fight, designed to scare voters. And just to complicate matters, a hike of the debt ceiling can be subjected to — you guessed it — a filibuster.

WITH TREASURY BOND YIELDS CONTINUING TO FALL THIS MORNING, a fight over debt levels isn’t a big concern for the fixed income markets. But this dispute could become an irritant by fall; Treasury Secretary Janet Yellen might have only a couple of months to keep the government running past the July 31 deadline.

THE BIG CASUALTY of a debt ceiling fight could be Biden’s agenda, which might bog down. He may have to settle for a modest infrastructure bill — or a fight dragging well into the fall.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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This post was first published at the AGF Perspectives Blog.