the debt ceiling

I know a potential domestic political/economic mess is looming over the next few weeks/months. For the first time in a long while, however, I find I have almost no clue about how events will play out.

At issue is the debt ceiling, a Congress-mandated limit on the amount the federal government can borrow to fund its operations. At one time, getting Congressional approval was routine. Over the last couple of decades, though, this has become a contentious issue.

The situation I think is most similar to today’s came during the Obama administration. Republicans demanded reduction of Medicare benefits as their price for lifting the ceiling. There was a small stock market decline just prior to an eleventh-hour compromise. Almost immediately after, however, S&P downgraded its rating on US Treasury bonds, apparently reasoning that for the first time there was a smidgen of doubt that the US would make interest payments on government debt. The stock market dropped by 10%+ on the downgrade.

The government was actually shut down by Trump in late 2018, when he refused to sign a spending bill passed by Congress because it didn’t contain funding for his border wall. What I think is important about this situation is that Trump quickly reversed course when he realized that voters (correctly) blamed him for the resulting reduction in government services, not Congress.

Perhaps learning from the Trump experience, Republicans, who oppose an increase to the debt ceiling without concessions to them, are not 100% about what they want in return for their votes. The general idea seems to be cuts in everything except defense, with special emphasis on programs for low income families. One innocuous-sounding item is a decade-long limit on nominal growth in overall federal government spending to 1% yearly. This, however, amounts to a 20% reduction in real government spending, assuming 3% annual inflation (although the Fed wants 2%, I think this is an aspirational goal rather than a genuine target).

Two other things:

–in the past, most of the negative stock market action around debt ceiling worries seems to have occurred in the few weeks leading up to an ultimate decision

–the leading lights on the Republican side seem to be more cultural performance artists in the Trump mode than actual legislators. So it’s not clear they’ve given much thought to what they’re doing. An analogy would be the DeSantis attack on Disney, his state’s largest taxpayer. Not only do I find the attack itself odd, but if press reports are correct–and I suspect they are–a key part of the evidence against DeSantis in the subsequent DIS lawsuit comes from a book DeSantis recently wrote. And he’s a Yale and Harvard Law graduate.

Anyway, I find this all hard to handicap.

What am I doing? Combing through my holdings, kicking out clunkers and (very unusual for me) not putting the money back to work right away. Experience tells me this is a bad idea. But experience is also not giving me much of a guide to what comes next.

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