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There is a quiet whisper among Wall Street independents and even some Democratic donors in the financial sector: If House Republicans are going to win, they better win big.
Why it’s important: Investors are growing concerned about what a narrow majority for House Speaker Kevin McCarthy (R-Calif.) would mean for the first major battle of divided government: raising the debt ceiling.
- At private fundraisers and investor conferences, many worry that a razor-thin GOP victory would leave a fragile McCarthy speakership — giving conservative lawmakers an opportunity to play chicken with the White House.
- At the debt ceiling, that means America’s full faith and credit could end up as roadkill, potentially cratering markets and wiping out trillions of dollars across a range of asset classes.
What they say: “Investors are worried about all the very public talk from McCarthy and the Freedom Caucus about bringing us to the edge of the debt ceiling,” said Charles Myers, chairman of Signum Global Advisors.
- “McCarthy winning by a larger margin would be welcomed by investors because it gives him more room to maneuver,” he said. “All 20 [seats] or higher would be considered enough to give McCarthy control and power over the most extreme part of the caucus.”
Driving the news: As Republican prospects improve in the latter part of the campaign, McCarthy’s statements — about both potential policies as well as his legislative strategies to achieve them — carry more weight.
- This week, he was explicit in suggesting GOP support for the debt ceiling would come with a political price. Democrats, he warned in an interview with Punchbowl News, would have to agree to cuts.
- Rep. Jim Banks (R-Ind.), who chairs the largest bloc of House conservatives and could become the next Republican whip, went even further on Thursday — calling the debt limit “an important leverage point” and insisting that “we have to use a moment like this to do things that the administration wouldn’t otherwise do.”
The big picture: With a divided government, the big battles between Congress and the White House are about funding the government, responding to international crises and raising the debt limit.
- The U.S. is likely to hit the $31.4 trillion cap, which was last raised in December 2021, early next year, according to the Bipartisan Policy Center, which monitors tax revenues and financial flows to estimate the so-called “X date.” (Even Treasury officials privately marvel at BPC’s accuracy.)
- But the Treasury has a few accounting tricks it calls “extraordinary measures” to buy some time, likely to put the actual “X date” in the third quarter of 2023.
Retrospective: In 2011, with a new GOP majority in the House staring down President Obama on spending and entitlements, the US was so close to defaulting on the debt that S&P downgraded the US’s AAA credit rating for the first time.
- After the debacle of 2011, Obama took a maximalist—and ultimately successful—position: He would not negotiate on the debt ceiling in 2013. Republicans ultimately caved.
- During Trump’s presidency, Republicans in Congress supported three increases in the debt ceiling without requiring policy changes.
What we see: The debt ceiling may come sooner than expected for two reasons.
The intrigue: Biden and congressional Democrats could raise the debt ceiling in a busy lame-duck session when they control both ends of Pennsylvania Avenue. It would essentially save McCarthy the headache of dealing with the demands of his members.
- But it’s unclear what political incentive Democrats have — other than keeping the U.S. economy from falling into the abyss — to solve McCarthy’s potential political problem for him.