This week’s midterm elections could make Congress’s debt ceiling struggle even more difficult.
After a red tsunami failed to materialize, Republicans will likely control the House of Representatives next year by thin majorities. Their speaker will have to negotiate with a more powerful right-wing that includes 180 recently elected members who dispute the 2020 election results, refuse to compromise with Democrats, and vow to use the debt limit to check the Biden administration.
With a Senate still up for grabs, Washington and Wall Street are worried about even more brinkmanship.
Charles Myers, founder of Signum Global Advisors, says, “The likelihood of a debt limit crisis has gone raised considerably because of the somewhat surprising conclusion of the midterms.” A more decisive Republican victory may have eased stress.
If Congress doesn’t lift the debt ceiling, the U.S. could default, which would have unforeseeable effects on the global economy. In 2011, markets, the U.S. credit rating, and stocks were shaken by a close government default.
Some economists believe a polarized Congress won’t adopt new industry rules or create corporate uncertainty, which benefits markets. In 2023, Myers doesn’t think feuding lawmakers will benefit the stock market.
“Many previous patterns or other frameworks don’t apply,” “”Gridlock wasn’t good,” he remarked.
Experts told Yahoo Finance this week that’s unlikely.
Myers predicts a 75% debt ceiling problem next year and a 25% chance that politicians will solve it.
“It seems like it’s fairly doubtful that they will strike a compromise on this in the lame duck,” he said in an interview this week. ”
The Freedom Caucus, a group of conservative Republicans, met in Washington this week to exert their power. This group wants Republicans to use the debt ceiling fight to reduce spending.
Outgoing House Ways and Means ranking member Kevin Brady, who is not a Freedom Caucus member, predicted that debt ceiling talks will include government spending.
“I do expect a dialogue about how America and Congress solves our financial foundation for the long term,” he stated this week.
‘Much pandemonium’. First, the U.S. must exceed the debt ceiling. The Treasury Department uses “exceptional measures” to shift money and delay the crisis. However, the U.S. will eventually run out of money. X-date.
In June, the Bipartisan Policy Center predicted the X date would fall in July 2023, but inflation, increasing interest rates, and other economic obstacles have raised the prospect of a second-quarter 2023 relocation.
“There’s going to be a huge game of chicken here,” says New America senior fellow Lee Drutman.”
Drutman said Kevin McCarthy’s problem is “basically, if he backs down on this struggle, some Republican Party element would definitely try to oust him as Speaker.” Drutman claimed the gang may cause mayhem if they fail. After that fight, Standard & Poor’s downgraded the U.S.’s credit rating. As politicians argued, the stock market collapsed that summer.
Myers warns that brinkmanship might lead to U.S. credit downgrades, Treasury Bond interruptions, and dollar devaluation.
Washington and Wall Street expect additional political theater in 2023, despite Biden’s optimism this week.
Drutman cautions, “It’s just brinkmanship until somebody miscalculates [but] every now and then somebody accidentally tosses out the steering wheel and the thing crashes.”
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