Republicans and Democrats are likely to face off next year over the debt ceiling, a fight that could rattle financial markets, unnerve consumers and threaten the economy with the specter of a calamitous default.
The looming debt limit battle in Washington could spark the most uncertainty since the 2011 tightrope crisis that cost America its perfect AAA credit rating and caused chaos on Wall Street, warned Goldman Sachs in a note on Monday.
“To raise the debt ceiling next year, bipartisan support will be necessary but hard to come by,” Goldman Sachs economists wrote in the report.
The “debt ceiling” is exactly what it sounds like – the maximum the federal government is allowed to borrow, after Congress set a level more than a century ago to reduce government borrowing. But when the going gets tough, Congress has in the past raised the debt ceiling to avoid a US debt default that economists say would be a “financial Armageddon.” That’s what lawmakers did in late 2021 after the latest debt ceiling standoff.
Goldman Sachs notes that there have been “more false alarms over the past decade than really close calls.”
Washington also met last week to reach a deal that averted what would have been a catastrophic rail strike.
But Republicans have reported a brewing fight over the debt ceiling.
House GOP leader Kevin McCarthy, who is vying to become Speaker of the House, told CNN ahead of the midterm elections that Republicans will demand spending cuts in exchange for lifting the debt ceiling . Republican Sen. John Thune of South Dakota told Bloomberg last week that the debt ceiling could be a way to push through budget cuts.
This sets the stage for a dangerous fiscal showdown that risks a US debt default, or at least a close call.
“We remain concerned that governance dynamics will lead to fiscal struggles that could include a debt ceiling in mid-2023,” Isaac Boltansky, director of policy research at BTIG, wrote in a note. to customers this weekend.
Goldman Sachs noted that the political environment next year will have “echoes of 1995 and 2011” – the two most tense debt ceiling standoffs in recent history. The report says most, but not all, of those standoffs occurred when Republicans controlled at least one chamber of Congress during a Democratic presidency.
“Next year will provide the political and fiscal conditions for another disruptive debate, and wafer-thin majorities in both chambers and high inflation could further heighten uncertainty,” Goldman Sachs wrote in the report. “Although difficult to predict, it seems unlikely that next year’s debt limit deadline will create as much uncertainty as the 2011 experience, but there is a good chance that she’s getting closer than at any time since then.”
A close call could spark turmoil on Wall Street that would lead to losses in the retirement accounts and investment portfolios of ordinary Americans.
“It seems likely that uncertainty about the debt limit in 2023 could lead to substantial volatility in financial markets,” Goldman Sachs economists wrote, noting that the 2011 standoff helped drive a sell-off in the US stock market.
Beyond the markets, Goldman Sachs said a failure to raise the debt ceiling in time “would pose a greater risk to government spending and ultimately economic growth than to Treasuries.” themselves”.
Indeed, in order to avoid a default on the American debt, the federal government would move money to continue paying interest on the Treasury bills. It would create a massive hole that would have to be filled by delaying a host of other payments — including those that millions of Americans rely on, such as federal employee paychecks, veterans benefits and security payments. social.
“Failure to make payments on time would likely hit consumer confidence hard,” Goldman Sachs wrote.
The good news is that Washington appears to have plenty of time to reach a compromise on the debt ceiling before things get risky.
Jefferies economists said in a recent research report that default risk is unlikely to emerge until “at least” late September next year.
Although federal debt is expected to reach the statutory limit in the coming weeks, Goldman Sachs said the Treasury Department should be able to borrow as usual until late February or early March. At this point, the government could tap into a stockpile of $500 billion in cash to fund the deficit through August.
Beyond that, there’s a lot of uncertainty about exactly when the risk of default would appear due to a number of moving parts, including student debt repayment and tax revenue.
“Funds could run out as early as July and into October,” Goldman Sachs said.
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