First, congratulations to both Kevin McCarthy and Joe Biden on the debt ceiling deal. The Senate and House need to pass this deal whether they like it or not. There just is no time left.

The most important part of the deal is it will last for 2 years. Dana Obeidallah from CNN writes that for Democrats who don’t like the deal, some things could be reversed if they win back the House in 2024, and still have a Democratic president.

Even better would be win back the House in 2024 and get rid of the debt ceiling.

Stay tuned,

Dave

House Majority Leader Kevin McCarthy and President Biden have had a number of meetings this week to finalize a debt deal. As I have said many times, the debt ceiling should be approved without any conditions. It is not authorization to spend money, but to borrow enough money to pay the bills.

Treasury Secretary Yellen has stated that the debt ceiling must be raised on June 5 to avoid sovereign default. The consequences of default are extremely serious in terms of employment and the chance of recession. See link below:

Link Whitehouse.gov: Debt Breach

The deal in progress is to lift the debt ceiling sufficiently to cover the next two years. So, June 2025 would be the next time the US would once again be in this game of brinkmanship.

The major sticking point seems to be tougher work requirements for Federal aid program including food stamps and Medicaid. I can understand why the Medicaid work requirements are particularly contentious, as the states would be enforcing denial of medical payments to low income families. And, you can be sure if you live in a strong Republican state, officials would be blaming it on Washington, namely President Biden, for loss of medical benefits.

The future spin of Republicans in the 2024 election, is that the idiots in Washington (Democrats) spent all the money on the Ukraine war, so there is nothing left to pay for food and health needs for the poor in the US. And nobody has a job because Biden let everyone in over the border. Powerpoint bullet: Too much is spent outside the US and too little inside.

The reality is that it is the Republicans who are circumventing the democratic process and pushing through their own agenda on the threat of driving the US into default.

Link: Tougher work requirements for federal aid programs pose obstacle in debt limit talks

The only other country with a debt ceiling is Denmark, which is set so high, that it never becomes an issue.

Link: Denmark’s Debt Ceiling

Economist Paul Kruger explained in a recent New York Times column that government debt is not comparable to personal debt. Personal loans can really be destroy lives when individuals no longer have the ability to repay them. This can often happen later in life. Governments don’t have a lifetime, and as long as there is confidence from the financial community (particularly credit rating agencies), that the reserves and revenue stream are sufficient to service the debt, then our credit is fine.

McCarthy is actually fighting two battles, one with Biden and Democrats, and the second one with his own party. Within the Republican party, there are a known set of obstructionists, who will be quick to point out the insufficiencies in the deal. They will likely minimize the risk of default, a horrible mistake.

There is a third group, which I will call the sideliners, and this includes the Freedom Caucus and Donald Trump, who will almost certainly attack the deal as insufficient. Anyone who attacks the deal as being weak, will be headline news on Fox News.

Former Treasury Secretary Jack Lew was on a cable station, echoing Yellen’s warning that default would be catastrophic. Further, he suggested that if work requirements for federal aid programs can’t be resolved by June 5, just take them off the table for now, and leave them to future discussions.

This is the democracies should be working and it takes a lot of work to resolve issues. Maybe Medicaid is in need of reform. In that case, Republicans should work to explain what they want from their constituents, gain more representatives in the Senate, and win a majority in both houses, to pass for Medicaid reform.

The Democratic process makes a whole lot more sense than to hold the US economy hostage until Republicans get what they want.

Stay tuned,

Dave

Scary stuff from the US Treasury on May 22:

“With an additional week of information now available, I am writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” Yellen wrote Monday [May 22].”

Under these conditions, Kevin McCarthy would in a more rational world just buy time, by passing a bill that would suspend the debt ceiling for a couple of months. Why isn’t he doing it? To pass a suspension, would require the vote of a small group of Republicans who think all this brinkmanship can work to their advantage. They want their pound of flesh from Biden. It is a political power game. And this time, it just might go too far.

Yes. Default is a self-inflicted wound. The equivalent of crashing a plane to draw attention to flight safety.

I know the country would be just fine without a debt ceiling. Congress already has the authority to raise or lower taxes and approve spending. Yes, if Congress does not approve a budget, we go in shut down mode, where government services must be cut. This is very different. The US can not default on its debt as the world depends on the dollar.

The minting of a trillion dollar coin, issuing premium bonds and invoking the 14th amendment, have all been suggested, and described by others as gimmicks, which would result in a massive loss of confidence in the credit of the US.

I don’t know how the next 1-3 weeks will play out.

Stay tuned,

Dave