by Greg Valliere, AGF Management Ltd.
A CHAOTIC FALL is shaping up in Washington, with the outlook for massive new spending and taxes now in doubt — and a nasty debt ceiling fight threatening to annoy financial markets by next month.
COMPOUNDING THIS UNCERTAINTY is the Delta variant, which chilled the unemployment data last Friday and may persist after 80,000-plus people jammed into football stadiums around the country this past weekend. With fatalities running at over 1,000 per day, the virus may dissuade people from returning to work just as unemployment benefits end.
HERE ARE THE THREE BIG ISSUES —
1. Federal Reserve tapering of asset purchases still seems likely to begin by year-end, but last Friday’s disappointing jobs data will delay the timetable a bit. Dovish Chairman Jerome Powell, still the favorite to win another term, will make it clear that a rate hike is a year away — or longer.
2. The fate of massive infrastructure bills is cloudy as key Democrats in both houses balk at the price tag. The $1 trillion bill for highways, bridges, water, etc. will not be fully paid for. And the $3.5 trillion social spending package is clearly not credibly paid for, so Democrats are looking at Plan B — even more new taxes.
Bloomberg and others reported this weekend that Democrats are seeking a wide range of controversial taxes that would be a nightmare for the financial services industry — a tax on stock buybacks, curbs on executive compensation, a dramatic hike in Biden’s capital gains tax, plus a potential carbon tax.
No word yet from moderate Democratic Sen. Joe Manchin on this trial balloon, but we’d guess he would be opposed, along with Sen. Kyrsten Sinema. If tax hikes are pared back, the second infrastructure bill would be in trouble because there’s no way to pay for it. One option that progressives are considering is simply NOT paying for it.
Nancy Pelosi thinks she can get a House vote on both bills by Sept. 27. But it’s highly unlikely that the Senate would go along, which might produce a stalemate that could persist for many weeks. A budget resolution thus won’t be ready when the fiscal year starts on Oct. 1, which would require a continuing resolution lasting well into December.
3. Complicating all of this will be an increasingly urgent issue — raising the federal debt ceiling, which already has been exceeded. Treasury Secretary Janet Yellen is relying on “extraordinary measures” to keep the government afloat, avoiding a default. Republicans are adamant that they will not raise the ceiling, so Yellen will need virtually every Democratic vote, which is far from certain.
The debt ceiling always gets raised, but this time will be nerve-wracking, amid threats of a government shut-down. Can massive infrastructure bills win passage in this climate? A major haircut will be required, which could force angry House progressives to oppose infrastructure spending rather than accept pared-back bills.
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JUST AS THE AFGHANISTAN DEBACLE threatened to cripple Biden’s presidency, Democrats caught two breaks —
First. The radical Texas abortion law, empowering vigilantes and outlawing the procedure even in cases of rape or incest, has given the Democrats an emotional issue. Polls show a majority of Americans favor Roe v. Wade; this issue could energize young and female voters. Republicans are still favored to capture the House next fall, but that could be a closer call because Texas Gov. Greg Abbott has over-played his hand.
Second. The likelihood of a comfortable win by Gavin Newsom in his California recall election on Sept. 14 will elevate the embattled governor. If he wins fairly easily, as we expect, Newsom will instantly become a star in a party that needs fresh blood. Another major player will be Eric Adams, the African-American ex-cop, who will easily win the New York City mayoral election on Nov. 2.
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This post was first published at the AGF Perspectives Blog.