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Debt ceiling negotiations between the White House & congressional Reps took on a new, harder tone this week after House Speaker Kevin McCarthy signaled that he was not willing to compromise with Dems over a list of GOP demands. Instead, McCarthy's deputies say they view a vote to raise the debt ceiling — & to avoid a potentially catastrophic US debt default — as a concession to Dems, & potentially the only one they plan to make. Given the havoc a default could wreak on the global economy, increasing the borrowing limit is typically a formality, often structured as a companion bill that gets tacked on to unrelated legislation. Rep Patrick McHenry, a chief GOP negotiator, was asked last night what concessions Dems were getting as part of a potential compromise with the White House to win both Rep & Dem votes. “The debt ceiling,” he replied. “That’s what they’re getting,” added Rep Garret Graves, another GOP negotiator. Reps hold a narrow majority in the House, while Dems have a one-seat edge in the Senate. So negotiators need to craft a bill that can pass in both chambers. Rep demands for policy changes that many Dems would never vote for will complicate any eventual deal's path thru Congress. A Dem official said Reps have already rejected at least 2 compromise offers from the White House. The first proposed a gov spending freeze next year at its current level & another offer would put in place a 2-year cap on spending. While their demands could change, below are the key concessions Reps want from Dems, in exchange for their vote to raise the debt ceiling. Some are relatively easy, while others are proving intractable.
What Republicans want in exchange for raising the debt limit
The US gov is hurtling toward its first-ever default on the debt that could be catastrophic for the economy, destroying more than 7M jobs & triggering a severe recession. That's according to a recent analysis from Moody's Analytics, which predicted a disastrous hit to the economy equivalent to the 2008 financial crisis in the case of a prolonged breach of the federal debt ceiling. In that bleak scenario, the unemployment rate would skyrocket above 8%, GDP, the broadest measure of goods & services produced in the nation, would plunge by 4% & stock prices would fall by nearly 20%, wiping out $10T in household wealth, according to the report, led by Moody's chief economist Mark Zandi. "The blow to the economy would be cataclysmic," Zandi wrote. Even in the case of a brief debt default that is quickly reversed, "significant damage" will have already been done to the economy, the analysis shows. GDP would slide by about 0.5%, while unemployment would increase by 1M Americans to about 5%. There would also likely be a sell-off in financial markets, but it would settle after lawmakers struck a deal to raise or suspend the debt limit. "The timing could not be worse for the economy; even without the specter of a debt limit breach many CEOs and economists believe a recession is dead ahead," Zandi added. "With the Federal Reserve ramping up interest rates in an effort to quell wage and price pressures, avoiding a recession would be difficult even if nothing else went wrong." The clock is running out for lawmakers to lift the debt limit. Treasury Secretary Janet Yellen reiterated a warning yesterday that the country will run out of cash to pay its debts in early Jun, potentially as soon as Jun 1. "It’s highly likely that we would run out of resources to meet all the government’s obligations in early June and possibly as early as June 1," she said. "We no longer see very much likelihood that our resources will enable us to get to the middle or end of June."
US debt default could destroy 7 million jobs, analysis shows
The German economy entered a technical recession in Q1, as households tightened spending. Data from the German statistics office showed a downward revision to GDP (gross domestic product) from zero to -0.3% for the first 3 months of the year. This comes after Germany recorded a 0.5% contraction in Q4-2022. 2 consecutive qtrs of negative growth define a technical recession. Europe's largest economy has been under significant pressure, particularly in the wake of Russia's invasion of Ukraine & the subsequent decision of European leaders to cut ties with Moscow. According to the statistics office, German households spent a lot less in Q1, with final consumption expenditure falling 1.2% over that period, as consumers were reluctant to spend their cash on clothing, furnishing, cars, etc. “Germany did fall into recession at the end of last year, after all, as the shock in energy prices weighed on consumers’ spending,” Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said. He added that it is unlikely that the German GDP will continue to fall in the coming qtrs, “but we see no strong recovery either.” The latest economic development takes place against a backdrop of high inflation & high interest rates across the region. The ECB is expected to raise rates again at its next meeting on Jun 15. The central bank has lifted its rates by 375 basis points since Jul. German Central Bank Governor Joachim Nagel said earlier this week that the ECB has “several” more rate increases ahead & is one of the most hawkish members of the central bank. The 10-year German Bund changed hands at around 2.46%.
German economy enters recession as first-quarter GDP data is revised lower
Uncertainty around the debt ceiling is weighing on the broader market. Yesterday Fitch warned it might downgrade the US AAA credit rating. Dysfunctional DC is bleeding thru to other areas of finance, with a credit downgrade already seen as a coming event. Germany's recession will be haunting US investors.Dow Jones Industrials
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