**Biden's Game Of Chicken: "We Won't See A Debt Ceiling Solution Until The Market Panics"**
Biden's Game Of Chicken: "We Won't See A Debt Ceiling Solution Until The Market Panics"
_By Philip Marey, Senior Strategist at Rabobank_
**Summary**
- _Yesterday, Treasury Secretary Yellen sent a new letter to the Congressional leadership, with the message that the X-date could arrive as soon as June 1._
- _With the adoption of the Limit, Save, Grow Act in the House of Representatives and President Biden’s unwillingness to negotiate about conditions for a raise in the debt limit, a game of chicken between Republicans and Democrats has started._
- _So far, markets reacted to the possibility of a US federal government default with a revealed preference for one month treasury bills over longer dated T-bills. However, we are still far from the panic needed to break the stalemate between Republicans and Democrats. This is likely to occur closer to the X-date._
- _Either this game is over within a few weeks or we are going to see a suspension of the debt limit until later this year **. In both cases, we are not likely to see any solution until financial markets start to panic.**_
**Introduction**
Although the midterm elections in November turned out better for the Democrats than could have been expected based on the high inflation rate and President Biden’s low approval rating, they lost their majority in the House of Representatives. With the 118th Congress in session since early January, the balance of power in Washington DC has shifted. After two years of Democratic Control, with Democratic majorities in both chambers of Congress and a Democratic President, the Republicans are now able to shoot down any bill on the House floor in the next two years. This means a regime shift has taken place in US politics this year to Divided Government, where legislation requires bipartisan cooperation. The first of the fiscal standoffs that we warned for in Midterm implications is already taking shape and it is the most dangerous one, the debt limit.
**McCarthy’s move**
On April 26, the House of Representatives adopted the Limit, Save, Grow Act of 2023, presented by House Speaker McCarthy a week earlier, with a 217-215 vote. All Democrats voted no, so did four Republicans. The bill, drafted by the leadership of the House Republicans, in consultation with various members, raises the debt limit by $1.5 trillion or until March 31, 2024, whichever comes first. Note that the current debt limit of $31.381 trillion was reached on January 19, after which the Treasury Department started extraordinary measures, postponing the X-date, when the Treasury will be unable to meet all of its debt obligations. In exchange for the higher debt ceiling, the House Republicans want to limit government spending. The bill sets discretionary spending for fiscal year 2024 (October 1, 2023 - September 30, 2024) at the level of fiscal year 2022 and then limits growth in discretionary spending to no more than 1% a year in the next decade. The bill also rescinds unspent COVID relief funds, and make changes to energy, regulatory and permitting policies. However, the plan also cuts the increased funding for the Internal Revenue Service (IRS). What’s more, it will prevent implementation of President Biden’s student debt cancellation and Income-Driven Repayment (IDR) expansion, and impose or expand work requirements in several federal safety net programs. This means serious concessions by the Democrats, which they are not likely to agree to. In fact, President Biden has made clear repeatedly that he does not want to negotiate at all. His position remains that he wants a “clean” debt limit raise, i.e. without any condition.
**Biden’s game of chicken**
With the adoption of _Limit, Save, Grow Act_ by the House of Representatives, and Biden’s demand for a “clean” raise of the debt limit, a game of chicken has started between Republicans and Democrats. Both parties want to avoid a government default, which would cause significant damage to the financial markets and the economy. Consequently, the so-called X-date, when the extraordinary measures are exhausted, is the deadline for the game of chicken. In the time before the deadline, we are not likely to see any party blink, unless a financial market panic breaks out. **Once the deadline passes, neither party has an interest in keeping the US in default. By this time, financial markets will definitely be in turmoil.**
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It could be argued, especially by Democrats, that as the Republicans are the party attaching conditions to the debt limit increase necessary to avert or end the default, they are likely to bear most of the pressure to concede. This argument frames the cu…