If a new budget is not passed by 30 September 2023, the government will shut down at midnight. It is possible for Congress to extend that deadline with a continuing resolution (CR) that permits government agencies to keep spending at existing levels for existing programs until Congress gets around to passing a budget.
Just as the Republicans have their wish list of policies before they raise the debt ceiling, the White House has a wish list of policies to include in the new budget. These include:
- Billionaire Minimum Tax
- 400% increase on the stock buyback tax
- Forcing Republican states to adopt Medicaid
- Assault weapons ban
- Universal pre-K
- Renewing and expanding the Child Tax Credit
Of course, Republicans are no more amenable to the White House’s wish list than the White House is to the Republican demands regarding the debt ceiling increase.
How the budget battle and debt ceiling clash will revive the spectre of MMT
As noted, supporters of Modern Monetary Theory (MMT) have had the luxury of getting everything they want politically without having to stand up and defend MMT publicly. COVID and climate change (bogus climate alarmism) acted as the perfect cover for the Trump and Biden spending, seemingly without having to worry about debt or deficits at all. The mantra in Washington was ‘spend, spend, spend’. And they did.
Now that the pandemic is over and the Green New Scam is law (for better or worse), a day of reckoning has arrived. If the debt ceiling is raised and deficit spending is increased without serious reforms, it will be left to MMT proponents to explain why none of this matters. They will rise to the occasion.
The main tenets of MMT are that debt and deficits don’t matter because the Fed can monetise the debt by creating money and buying it. The thought leader of MMT, Professor Stephanie Kelton of SUNY Stony Brook, says the US doesn’t even need a bond market. The Fed can just wire money directly to government contractors to pay bills.
The government bond market is merely a ‘favour’ to investors, so they can have a place to put their money. The Treasury doesn’t need to borrow money — it can just call upon the Fed to print it. If inflation emerges, the government can simply raise taxes to cool off the inflation.
Professor Stephanie Kelton of Stony Brook University (SUNY) is the leading proponent of Modern Monetary Theory and the author of the most popular book on the subject, The Deficit Myth. She was formerly Chief Economist of the U.S. Senate Budget Committee and an economic advisor to the presidential campaign of Senator Bernie Sanders (I-VT). Kelton is well-known in Washington policy circles and will certainly be called upon for analysis and testimony as the pandemic spend-a-thon wanes and the Republicans seek fiscal responsibility.
Source: The New York Times
Seriously, I’m not making this up. It’s all in Professor Kelton’s book, The Deficit Myth.
Of course, MMT is nonsense. Particularly, Kelton and her ilk show no understanding of the role of banks in intermediating money creation (it’s not all about the Fed and everyday Americans). They also do not consider the role of foreign exchange markets as a source of inflation through exchange rates and devaluation.
One can be reasonably sure that if members of Congress don’t understand MMT, they do not understand the flaws in MMT. But that won’t stop the banner from being raised. Expect to hear a lot of commentaries that ‘deficits don’t matter’ and ‘debt doesn’t matter’ as the debt ceiling and budget battles are being waged in the months ahead.
Benefiting from default talk
We can be sure of a few things. The Treasury will not default on its debt. You’ve likely been reading a lot of stories about a debt default. Whatever your views on the debt ceiling, you can ignore these default stories. It won’t happen because it serves no one’s interest.
A better way is to think of the debt ceiling debate as a game of chicken between conservative Republicans and the White House. In the end, Republicans will get some (not all) of what they want, and the debt ceiling will be raised. That will lay the issue to rest…until the next time.
Passing the budget is more complicated. The budget is huge, and there’s a lot more at stake than just debt issuance. Spending increases, defence spending, support for Ukraine, social programs, tax increases, and more are all on the table.
Although the budget deadline is 30 September 2023, Congress will try to get something done over the course of July and August. This will happen while the debt ceiling and X-Date crisis are playing out.
At a minimum, investors should expect increased market volatility as default talk grows louder. It may be a good time to reduce equity exposure and increase your cash allocation.
Strangely, the default talk may cause interest rates to rise and bond prices to fall. If you don’t believe the government will default on its debt (I don’t), that could be a good time to purchase Treasury notes at higher yields and lower prices.
In the end, the debt ceiling will be raised, most likely in July. But a US Government shutdown in late September is a real possibility. That will be another point of high volatility in stocks. All in all, it will be an interesting year.
All the best,
Strategist, The Daily Reckoning Australia