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Calling Mitch McConnell’s Debt Ceiling Bluff

Summary:
Sotto Voce Declarations Senate Majority Leader Mitch McConnell woke up on the wrong side of the bed on Monday.  Who could blame him?  His summer vacation’s been ruined.  President Trump’s been riding him all month like a pack mule.     The spoiler of Mitch’s summer vacation. People should generally avoid finding themselves on the receiving end of the master Tweeter’s fire and fury mode if they suffer from conditions such as geographic distance insufficiency or complete lack of nuclear deterrent syndrome. [PT]   What’s more, on Monday McConnell had to rise early and put on his suit and tie like an ordinary working stiff.  While his Congressional cohorts were busy vacationing in their summer recess, McConnell had important business to tend to that couldn’t wait until the return of

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Sotto Voce Declarations

Senate Majority Leader Mitch McConnell woke up on the wrong side of the bed on Monday.  Who could blame him?  His summer vacation’s been ruined.  President Trump’s been riding him all month like a pack mule.

 

 

The spoiler of Mitch’s summer vacation. People should generally avoid finding themselves on the receiving end of the master Tweeter’s fire and fury mode if they suffer from conditions such as geographic distance insufficiency or complete lack of nuclear deterrent syndrome. [PT]

 

What’s more, on Monday McConnell had to rise early and put on his suit and tie like an ordinary working stiff.  While his Congressional cohorts were busy vacationing in their summer recess, McConnell had important business to tend to that couldn’t wait until the return of Congress on September 5.  Namely, he had to make a public display of unity in his home state of Kentucky with Treasury Secretary Steven Mnuchin.

Following a social media lambasting of a deplorable taxpayer by Mnuchin’s new bride, and Mnuchin’s visit to Fort Knox to confirm the “gold is safe,” it was finally time to get down to business.

 

Treasury secretary Mnuchin goes on a gold inspection tour to Fort Knox and finds out that the assumed-to-be-there gold is actually safe!

 

Together, McConnell and Mnuchin held hands and insisted the U.S. government will raise the debt ceiling and avoid defaulting on its debt.  McConnell even made the following declaration:

 

“There is zero chance — no chance — we won’t raise the debt ceiling.  No chance,” McConnell said.  “America’s not going to default.  And we’ll get the job done in conjunction with the Secretary of the Treasury.”

 

Indeed, McConnell’s declaration was unequivocal.  But is it believable?  And who was he trying to convince?  Himself?  Wall Street?  President Trump?  Let’s explore…

 

Calling Mitch McConnell’s Debt Ceiling BluffClearly, something needs to be done…

 

Thumbs Down

As far as we can tell, McConnell’s an amiable enough fellow.  He likely tips his barkeeps well.  He most definitely holds doors open for old ladies.  He may even strike a match after passing gas to mask the foul stench.  We don’t know.

But what we do know is that as Senate Majority Leader, his recent track record unequivocally stinks.  In fact, just last month McConnell was unable to get a promised job done.  Here’s how CNN documented the failings at the time:

 

“If anyone could have resuscitated the troubled Obamacare repeal and replace bill, it was Mitch McConnell, the steady and disciplined Senate Majority Leader with a track record of getting really tough things done. But after years of pleading, months of negotiating, and weeks of just barely edging the contentious bill forward, it suddenly died.  The end was unexpected and dramatic, as McConnell watched Sen. John McCain — his longtime friend and occasional political rival — walk to the center of the Senate floor and turn his thumb down to vote ‘no.’”

 

We happen to think McConnell will have similarly disappointing results getting the debt ceiling raised.  So far, things aren’t looking good.  Treasury Secretary Mnuchin keeps saying he wants a clean debt ceiling bill, with no policy conditions attached.  But it doesn’t appear there is a snowball’s chance in hell that he will get what he wants.

 

Calling Mitch McConnell’s Debt Ceiling BluffOne of these days a debt ceiling increase will run into heavy weather…

 

Before the debt ceiling can be raised, big time horse trading will most definitely take place.  Agreements and side deals on Trump’s border wall, spending cuts, tax reform, military spending, and healthcare legislation will need to be established.  By then, Mnuchin will have run out of the new debt he needs to pay the nation’s bills.

In addition, President Trump’s not ready to budge on his border wall.  At a rally in Phoenix on Tuesday, Trump threatened to shut down the government in October if border wall funding is not included in his new budget, which coincides with when the debt ceiling needs to be raised.

And yesterday, via tweet, Trump assigned advance blame to McConnell and Paul Ryan for the pending debt ceiling “mess.”  Obviously, a gigantic fight will go down in Washington next month.

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Calling Mitch McConnell’s Debt Ceiling BluffDonald Trump and Mitch McConnell.

Photo credit: Nicholas Kamm / AFP / Getty

 

Calling Mitch McConnell’s Debt Ceiling Bluff

Last week we offered some thoughts on Why There Will Be No 11th Hour Debt Ceiling Deal.  Here we must clarify that we aren’t saying there will be no debt ceiling deal at all.  But rather, that it will come after Mnuchin has picked through all the seat cushions for pocket change, and stock markets have sufficiently panicked.

The fact is, McConnell has been dealt a bad hand.  After playing nice and biding his time in the Senate all these years, his time to be Majority Leader had finally come – he’d finally risen to the top of the trash heap.  What a disappointment it must have been to first look out at the 115th United States Congress and see the most dysfunctional collection of political miscreants and lowlifes in living memory staring back at him.

In a game of poker, the wise thing for McConnell to do would be to fold his hand, pick up his chips, and walk away from the table.  But his job is not a game.  And the stakes are far too high to just get up and walk away.

 

Federal debt to GDP ratio. Note that these data do not include any provision for the government’s unfunded liabilities. The ratio has been in an uptrend since the early 1980s, which was briefly interrupted during the Clinton presidency as the stock market bubble flooded the government’s coffers with capital gains taxes and social security surpluses created the false impression that there was an actual surplus. Since the 2008 GFC, the ratio has soared – it has now reached levels that are widely considered to retard economic growth substantially. [PT] – click to enlarge.

 

Thus, he’s left with one option.  He must bluff.  He must pretend the debt ceiling vote will be a piece of cake.  That it is business as usual and that there’s “no chance” the debt ceiling will not be raised.  That after much foaming and frothing a deal will be struck like it always has been in the past.

More importantly, he must convince stock market investors this is the case.  So far, his task of convincing stock market investors has been easy.  Most investors are complacently soaking up their remaining rays of summer sunshine.

 

Calling Mitch McConnell’s Debt Ceiling BluffMitch in the doghouse. Maybe someone will throw him a bone?

 

However, by the week of September 18 – if not before – all of this will change.  All lingering glows of Labor Day BBQs will be completely snuffed out by then.  Investors will sit down at their desks, look around, and quickly discern what credit markets are already telegraphing. That Senate Majority Leader McConnell is holding a hand of nothing. In other words, stock markets will call his bluff and sell in unison.

 

A collection of poker bluffs gone wrong…

 

Chart by: St. Louis Fed

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

About MN Gordon
MN Gordon

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He’s the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that brings clarity to the muddy waters of economic policy and targets investment opportunities for acquiring considerable wealth. The Economic Prism is written peering through a prism of free market principles, limited government, and individual liberty.

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