It hasn’t been a fun year for Wall Street. Or Washington.
But now, there’s a growing fury among Wall Street veterans that the Deep Thinkers in the Beltway have taken the games of partisan brinkmanship too far and are speeding toward mutually assured destruction.
From the U.S. Federal Reserve’s aggressive – and some believe, reckless – interest-rate hikes, which led to a string of failed banks in the past few months, to House Republicans’ rising threats to derail the economy over the debt ceiling, market participants are worn down, fed up and shifting to the sidelines.
“Confidence levels are very low,” says one bank director, who works closely with hedge funds and other deep-pocketed investors, to Power Corridor.
“People have been through a lot this year with the banking crisis. They don’t want to risk more capital right now and they’re either liquidating or waiting to make allocations until this is over. They don’t have a handle on what’s going to happen, and they don’t trust Washington. It’s a vote of no confidence in our government.”
This week, the White House strongly denounced legislation passed by the Republican-controlled U.S. House of Representatives agreeing to raise the nation’s debt ceiling by $1.5 trillion to avoid a default, in exchange for $4.5 trillion in cuts to government programs.
In an analysis of the bill, the White House Office of Management and Budget said House Republicans, while refusing to slash defense spending, want to cut “everything else in annual appropriations,” including life-saving medical research, education and veterans’ benefits.
President Biden is demanding the debt ceiling be raised to $31.4 trillion, without any delay or preconditions by members of Congress. Under President Trump, the debt ceiling was raised three times with bipartisan support. Biden is asking for the same, and says he plans to veto the Republican-backed debt ceiling bill, which likely wouldn’t fetch enough votes in the U.S. Senate anyway. However, that still leaves the matter unresolved, with the nation running out the clock on paying its bills.
Stepping into the void earlier this week, U.S. Treasury Secretary Janet Yellen wrote to House of Representatives Speaker Kevin McCarthy, who pushed for the House bill spending cuts. In it, she warned that there may be less time than Treasury originally thought before the U.S. runs out of funds, as her last update in January predicted it would be unlikely the government would exhaust all its cash and “extraordinary measures” before early June.
That no longer appears to be the case. In her letter dated May 1, Yellen updated her timeline to say, “after reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time.”
She said it was impossible to know with precision when the Treasury will no longer be able to pay the government’s bills. “I will continue to update Congress in the coming weeks as more information becomes available,” she added. “Given the current projections, it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments.”
The reaction across Wall Street to the letter was immediate. “Yellen really kicked it off,” the director says. “Anything she says now is going to be amplified by social media and the market spin cycle.”
He believes the letter wasn’t just a wake-up call to Congress, but a shot across the bow to “all the players,” from Washington to Wall Street to Main Street to brace for potential impact. “People are going to wait right now to invest any money,” he predicts. “At this point, we see the politicians in Washington have such a visceral hatred for each other, we actually believe they would go through with it and then blame each other for it.”
The last time a debt ceiling standoff came down to the wire was in 2013, when independent credit ratings agencies like Standard & Poor’s and Fitch were on the edge of downgrading the United States credit score to rock-bottom status. That was during another tussle over the debt ceiling under President Obama, also led by Republican House members.
At the time, the global head of S&P’s sovereign ratings committee, John Chambers, observed that no nation had ever gone into default for such a preposterous reason – political games over whether to pay debt America already owes. “It is simply not a characteristic of the most highly rated sovereign nations that you have to worry about them not paying their debts,” he said. “It is unheard of in a cohesive civil society, making it all the more puzzling and lamentable that we have these shenanigans over spending that has already been approved by Congress.”
In the end, it was the pressure from the credit agencies that helped force a resolution, but the memory still rankles. This time, even if Congress moves to raise the debt ceiling before the money runs out, Fitch’s global head of sovereign ratings, James McCormack, noted “repeated episodes” of Congress flirting with a catastrophic default threatens the nation’s credit score and standing in the world for the long haul. “When investors have to think about that, that’s not what you’re looking for in a risk-free asset, right?”
McCormack said if a near-default causes investors to question the role of the U.S. dollar as the world’s reserve currency, as well as the reliability of U.S. Treasurys as a risk-free market, Fitch could downgrade its top-tier AAA rating of the U.S., which it already has on negative watch.
Back in 2011, Chambers famously did downgrade S&P’s rating of long-term U.S. sovereign debt from AAA to AA+, due to what the credit agency saw as the deterioration of America’s global economic standing, following another virulent battle in Congress over spending cuts and raising taxes.
Notably, the S&P downgrade stemmed from President Obama approving legislation that sought to slash the fiscal deficit by more than $2 trillion over a decade, but that fell well short of the $4 trillion in savings S&P said the U.S. needed to fix its finances. (Interesting that the current fight over U.S. spending focuses on just over $4 trillion in cuts, which represent keeping government spending for fiscal 2024 at 2022 levels.) Before the S&P downgrade, the U.S. had enjoyed a perfect AAA credit rating since 1941.
While House Republicans see the cuts as necessary, the White House blasted them this week as “draconian” with “no precedent in America’s history.”
White House spokesman Andrew Bates suggested the spending reductions were to appease America’s wealthiest at the expense of more vulnerable groups like American veterans. “Prioritizing tax welfare for wealthy special interests over honoring our commitments to those who have put their lives on the line for our country is as backwards as politics gets,” he said.
The ink had barely dried on Yellen’s letter when President Biden invited McCarthy, a Republican from California, along with Senate minority leader Mitch McConnell, a Republican from Kentucky, to the White House next Tuesday to hash out a detente. Also in attendance will be Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries, both Democrats from New York.
Biden has previously stated he will unequivocally not negotiate over the debt ceiling (even though that appears to be exactly what he is doing). A senior administration official characterized the meeting of the President and the Big Four congressional leaders as “primarily about negotiating the normal budget process” among members of the group, “and of course, any bill to avoid Congress forcing a default on the American people has to pass both chambers of Congress.”
As this debt ceiling fight has happened before and, plainly, there’s nothing to stop it from happening again, there has been some talk of trying to find a final escape hatch. Some political and legal analysts have suggested these standoffs are, in fact, unconstitutional and, if push comes to shove, could be challenged in court.
Specifically, they point to Section four of the 14th Amendment of the U.S. Constitution: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
If Congress fails to lift the debt limit by the so-called X-date — the moment America’s cash finally runs out — this legal theory may well be Biden’s break-glass-in-case-of-fire option. That said, a constitutional challenge to the debt limit is unprecedented and would certainly face a storm of protests.
What isn’t unprecedented at this point is fighting over the debt ceiling. Shouldn’t there be a resolution to end this perennial battle once and for all?
A selection of recent reads, for your weekend rumination.
An absolutely essential long read out this week from Anne Applebaum and Jeffrey Goldberg in The Atlantic about Ukraine’s prospects for breaking its military stalemate with Russia – perhaps even forcing Russia out of Crimea for good – and how “the future of the democratic world” may very well hang in the balance. The story is fascinating, not just for the windup it provides of Ukraine’s much-anticipated spring counter-offensive, but also for the deeper history of Russia’s tensions with territories claimed by Ukraine, a country Russian President Vladimir Putin finds convenient to believe does not exist.
Earlier this week, we highlighted the work of Khadeeja Safdar and David Benoit in The Wall Street Journal, after they uncovered thousands of pages of calendar files and emails from Jeffrey Epstein from 2013 to 2017. This was not long before Epstein died in prison in 2019. The files closely chronicle his activities, kibitzing with CEOs, celebrities, global leaders and titans of industry, and leaves wide open the question of, what exactly, was Epstein so ambitiously doing? The stories are part of a series, which you can read here, here and here. More to come it seems, as it looks like journalists – and not U.S. government officials, law enforcement or the justice system – will have to be the ones to tell the rest of this story.
To the world, the ruler of Dubai and prime minister of the United Arab Emirates, Sheikh Mohammed bin Rashid Al Maktoum, is an ally of the West. He is celebrated for transforming Dubai into a modern-day power hub and even published a book on it, “My Vision: Challenges in the Race for Excellence,” detailing his efforts to turn the city into a magnet for the world’s elite. He also has publicly placed gender equality at the heart of his plan to lift the U.A.E. to the top of the world economic order, vowing to “remove all the hurdles that women face,” according to The New Yorker’s Heidi Blake.
So, why have four royal women done everything in their power to escape his control? A chilling piece out this week that has stayed on my mind.
Thanks for reading, as always, and have an excellent weekend!