by Greg Valliere, AGF Management Ltd.
September 27, 2021
MIGRAINE TIME: Imagine your worst headache ever, and that might not match the big one that’s coming as the fiscal year ends at 12:01 on Friday morning. There are several major take-aways as the new week begins:
A Government Shutdown is Unlikely. The politicians aren’t brazen enough to shutter the government during a pandemic. A continuing resolution, probably passed on Thursday, will keep the government open until early winter.
Infrastructure bill: The $1 trillion deal for highways, bridges, wi-fi, clean water, etc. has a chance of passing in the House late this week, but combining it with a $3.5 trillion social spending package will be futile — there simply aren’t enough votes, especially in the Senate, for the latter measure.
So the major conclusion continues to be that a huge haircut is coming for the social spending bill, probably slashing it to $2 trillion or less. Even then, enormous issues will persist, such as the insistence of Democrats from wealthy states to restore a generous state and local tax break.
From what we’re hearing, this $3.5 trillion measure is in danger of collapsing from its own weight. Joe Biden has been aggressively working the phones, but his assertion last week that the $3.5 trillion package will “cost nothing” was dismissed even by his allies as ludicrous; the bill is loaded with accounting gimmicks and provisions that eventually will burden the states.
The key issue: If something less than $2 trillion is the best that Nancy Pelosi can get, will progressives take a walk and scuttle everything? That’s the risk.
Pelosi knows she doesn’t have the votes now for the social spending package, which isn’t fully written. Opposition to higher taxes is so great that some centrists have dusted off a carbon tax, with a rebate for low-income victims. Good luck with a carbon tax proposal in a climate this toxic.
The big issue for the financial markets obviously is the debt ceiling. It will get raised eventually, with Democrats forced to take most of the ownership. Debt default is a serious issue; we highly recommend the Wall Street Journal article this morning by Nick Timiraos on the Federal Reserve’s unpalatable options.
BOTTOM LINE: This policy migraine has several weeks to go, as Republicans fight Democrats and Democrats fight other Democrats. We’ll take inventory one day at a time; for this morning, the two big developments are that a shutdown is unlikely, and a mammoth social spending bill faces a major reduction — or worse.
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This post was first published at the AGF Perspectives Blog.
