One reason financial markets have been relatively sanguine about the debt ceiling negotiations is that investors have been almost certain that something gets done by August 2. Here is what one bank lobbyist told me today:
If the U.S. doesn’t get a handle on federal debt, there will be a financial and economic crisis. By 2035, debt as a share of GDP could be 250 percent, though a panic would surely happen long before that point was reached. But if a crisis came, how would Washington react? What drastic measures would be taken? I think there would be a huge push for a massive tax increase, probably via a value-added tax. Here is some of what the Comeback America Initiative sees happening:
These results from a survey by Northwestern’s Kellogg School of Management (via its Financial Trust Index site) are sure to get noticed in Washington:
Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a “deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:
So what are Republicans, particularly those in the House, going to do? Debt ceiling deadlines are fast approaching. And many in the GOP leadership, particularly in the Senate, think the party’s anti-tax resolve will dissolve if markets start to tumble, resulting in a deal far less appetizing than any discussed during the Biden talks. Certainly no hard spending caps or structural changes to entitlements or any other of the big things on the tea party wishlist.
So just how hostile is the GOP House toward McConnell’s new debt ceiling gambit (not to mention tax increases)? Here are some excerpts from a chat I had early yesterday evening with a GOP Hill source with good knowledge of the caucus. I think it gives some pretty good color: