WEAPON OF MASS DESTRUCTION — If you look casually at the stock and bond markets right now, it doesn’t appear that investors have any concern at all over the fact that the United States could default on its debt for the first time in history early next month. Stock prices are mostly stable and yields on Treasury bonds, even short-term ones, are not spiking. When investors sense impending disaster like this they usually dump U.S. debt, which sends bond prices lower and yields higher. This suggests that investors, who have seen debt limit dramas play out multiple times in the last decade, assume that no matter how far apart the White House and congressional Republicans seem now, they would not be stupid enough to allow a completely avoidable default to wreck the global economy. But look a little deeper and signs of stress appear. Spreads on one-year credit default swaps on U.S. debt hit an all-time high on Wednesday, surpassing anything seen in previous debt limit fights. The price for insuring against default on U.S. debt for five years hit its highest level since 2009. So while the most visible areas of the market seem to be taking the view that the drama will end the way it usually does — with some last-second, buzzer beating deal — less immediately visible indicators show rising concern. And that concern seems perfectly legitimate given a postponement in top-level talks and no obvious path to a deal. The first thing to know about the debt limit — created during World War I to free up the U.S. Treasury to issue new debt without needing a congressional vote every time — is that it is now a deeply stupid and dangerous weapon of mass destruction placed in the hands of politicians who mostly have no clue how horrific an actual default could be. Raising the limit, a snoozer of an event for most of the last century, has absolutely nothing to do with green-lighting more federal spending. It simply allows the Treasury Department to continue issuing securities — which underpin the entire global economy — to cover spending Congress already authorized. Republicans repeatedly terrorized President Barack Obama’s White House after taking over Congress in 2010, leading to multiple debt limit battles including one that rocked markets and caused the first downgrade of U.S. debt in history in 2011. The GOP had a significantly less difficult time supporting debt limit hikes under former president Donald Trump, though a deal in 2019 did include two years worth of spending caps. That is probably the general area around which a deal could materialize this year. The Biden White House and congressional Democrats would never accept anything remotely close to the dramatic budget cuts included in the bill McCarthy managed to squeeze through the House last month with exclusively GOP votes. That measure — if it exempts military spending and doesn’t slash entitlements like Social Security and Medicare as Republicans have promised — would require massive annual cuts in other areas of discretionary domestic spending. Republicans know they have no shot at getting something like the House bill enacted into law. But McCarthy did pull off a remarkable feat by passing the bill and punting the issue to Democrats for a counter offer. That offer may eventually include a couple years of spending caps, return of unspent Covid stimulus money and permitting reform that Republicans want. Officials in the White House and Treasury Department are very quietly trying to craft such a counter to the McCarthy bill that could win majorities in the GOP House, the Democratic Senate and wind up with President Joe Biden’s signature. One big problem is no one is exactly sure when Treasury will run out of its current “extraordinary measures” to keep paying the nation’s bills. Both Treasury and the Congressional Budget Office say this so-called “X-date” could be as early as June 1. But if it slips a little later, the payment of quarterly corporate taxes on June 15 should extend the drop-dead date significantly later into the summer. Nobody on earth knows what would actually happen if Treasury missed payments on existing bonds, the technical definition of default. There is no safer haven in the financial world in times of crisis than U.S. debt, so it’s at least possible a default could actually boost the value of Treasury bonds. But it could also send the stock market into a nose-dive, push an already slowing and inflation-plagued U.S. economy into deep recession and drag the rest of the world along with it. Republicans believe they have the upper hand in terms of public opinion about reigning in long-term debt and deficits. And they do. But polls suggest Americans are able to separate the debt limit issue from broader questions about long-term spending. And debt limit brinkmanship has burned the GOP every time in the past. So all sides have incentives to cut a deal, which is why there is little obvious stress in markets. But the closer we get to June 1 without an agreement, the obscure signs of market pressure will turn into blaring sirens. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight’s author at bwhite@politico.com or on Twitter at @EconomyBen.
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