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๐จDebt Negotiations PAUSED - Default? w/ Anthony Scaramucci
Recorded: May 20, 2023 Duration: 1:46:52Space Recording
Short Summary
The conversation centers around the U.S. debt ceiling negotiations, highlighting the political and economic implications of a potential default. Key points include the impact of the dollar's weaponization on its global reserve status, the political dynamics within the U.S. government, and the potential consequences of a default on the global economy. The discussion also touches on the challenges of reaching a bipartisan agreement and the broader economic trends affecting the U.S. and international markets.
Full Transcription
So, man, how's my audio?
Yeah, it's okay.
It's a little bit equit.
Okay, hold on.
No, man, I don't think it's echoey.
It's not echoey, Danish.
So, my man was just fucking with me.
That's what that was...
No, no, it sounds like.
It sounds like equy, but maybe then it's just me.
Ask the audience.
Okay.
Mario, it's good on your end?
Yeah, yeah, I won't be speaking much anyway,
but I can hear you perfectly fine
if you're referring to your audio.
Perfect.
I'll at least send out a few invites.
I've got a major panel today, Dr. Donish.
I mean, it's crazy. We've got Anthony Scaramucci coming. We've got Patrick Bed David coming. We have some people up already. Claudia, Jim, Joseph Wang. Wang, I just want to say it correctly. And, you know, a bunch of other awesome people, Peter. Thank you for joining us. It's going to be a crazy day today, actually. I feel like it's a kismat that
McCarthy just came out and essentially said that everything is halted until Biden returns,
which I thought was a very interesting move.
So we're going to be discussing this and many, many other things.
If you can also, so, Danish, if you can also compare it to what happened the last time they did this,
and they started playing politics when negotiating the debt ceiling.
Like in terms of 2011?
Yeah, I want to see how different that was.
Because back then, I think it led to the government shutting down for a few days, didn't it?
So in 2011, we got a downgrade, and that downgrade led to significant drop in, you know, in the market.
But it was, again, around raising the debt ceiling, and ultimately it led to passing of the Budget Control Act, the BCA in 2011.
But really, it was about very interestingly, and this is why it's so fascinating, in 2011, the Republicans actually gained control in January.
similarly, and then demanded that Obama negotiate the deficit reduction in exchange for an increase in
the debt ceiling, which is exactly what's happening right now. The debt ceiling have been raised
over and over and over again across multiple administrations, including Bush, but for some reason
now is becoming a big issue. And then...
you know, Obama actually,
well, a lot of things that we're going to talk about today,
Obama actually brought up,
like his team looked into the 14th Amendment,
which we'll discuss today.
And, you know,
then they looked into what happens when a default occurs.
And, you know, on July 31st, two days before the Treasury estimated that the borrowing authority of the United States would be exhausted, Republicans agreed.
So it was like literally at the brink of crisis that everybody came together. But in that time,
off and awful
what happened was we actually got a downgrade
as a country in terms of our debt
and that ultimately
led to the market crashing
and, you know,
again, I'm making it simple for everybody
that's listening, but it was
catastrophic in some ways and I think
you know, it was something that we have to
avoid. Now, the chances of a rating
agency downgrading the U.S. this time
is very low, right? Because they know that this
is the game that's played, but
I mean, it's no joke.
And we're not just another country.
We're the United States of America.
And we represent global currency.
And so, you know, we have the reserve currency of the world.
And so when we look like, you know, a country that cannot be trusted, it doesn't just affect us.
It affects everybody.
And so it's a very serious situation.
And I think both sides agree that this needs to be fixed.
And that was...
the issue. But what's been fascinating, Mario, for people outside the U.S., what's been fascinating,
my opinion, is, you know, this is not even about the budget. This is about the debt ceiling,
right? Which are two very different things. They're using the debt ceiling to negotiate some
provisions on the budget. So it's just saying, hey, we're going to continue to pay our bills
versus we're going to change our expenses. It's a very fascinating situation.
And Dr. Darnish, um,
Obviously, we know, and we've heard, and we've seen on the headlines, that the debt negotiations are paused.
But what's the timeline of events?
So we know, for example, in January, we heard some rumblings that the US wasn't going to meet its debt obligations.
And then essentially, you've seen Yellen who basically gave her the date of 1st of January.
So just walks everyone through a brief timeline of what got us here.
I don't think there's a drop dead date this time.
They're saying like June X.
I don't know.
Does anybody know of a drop dead date if I'm incorrect?
So she mentioned June the first, but then that's more of an arbitrary date because they said any time in June, July, August, this could happen.
Mark?
Is there a date?
Yeah.
Most of Wall Street is assuming that the June number is relevant.
So June 1st, just to be...
June 1st.
Oh, interesting.
So, yeah.
So what happens is on June 1st, now, if you actually look this up, the government has a document
that outlines all the things that would happen in the case that this occurs.
So what do we, you know, what do we prioritize first?
The...
The first thing we prioritize is what looks to be the currency.
We make sure that we're paying all of our debts to people that hold,
you know,
hold our currency and,
you know,
hold treasuries. And so these are the things that we would prioritize.
You know,
we would prioritize,
I can't remember off the top of my head,
but I will look this up.
So it's a good question.
Like,
what happens if we default?
And if somebody up here on stage knows,
like,
what would we do first?
What would we do second?
There is a list online that kind of walks through what would happen.
But,
It's a, it's a, you know, in medicine, we call it a never event.
It should never happen, right?
Like there are certain things that should literally never happen.
This is one thing that should never happen.
And I think that it's been very fascinating about the posturing around this where, um,
You know, we've seen politically people saying, like Trump, saying, oh, just don't, you know, hold the line, let it default, do whatever you need to do.
Don't let them do this.
Hilariously when he was asked separately at the town hall, you know, they just raised the debt ceiling and you didn't say anything.
He was like, well, I was president then.
And so it's a very fascinating sort of juxtaposition.
And again, remember that Biden is out of the country right now.
What an interesting time for him to make that trip.
Of course, the G7, but still, I mean, this is like a never event, like I said.
It is a very interesting game of chess that's occurring.
But, you know...
Dr. Donch, like, based on what you said...
I mean, we're going to go through all this.
And as you said, we're going to look at the financial aspect of it.
We're going to look at the political aspect and the political negotiations as well as what the demands of McCarthy are because, you know, that's quite important in terms of the debt ceiling.
And then as a Danishment mentioned earlier,
we are going to look at the 14th Amendment as well
and how that comes into play.
And why some people such as AOC are recommending Biden
to use the 14th Amendment in this scenario.
So those are different aspects.
And obviously we're going to come onto them.
But let's start, if that's all right,
with the financial aspect.
So, I mean, Mark, if this happens, if we default,
What are the immediate financial implications?
And what does it mean as well?
Before you even answer that, just for the audience,
what does it mean by default?
So an average person, we know what it means as a default for us,
but what does it mean for the country when they default?
It means the same thing, right?
It essentially means that our liabilities exceed our assets and based on the current budget within the limits of the debt ceiling,
meaning we cannot go into debt further than the current set amount that we're in a default.
Now, it is more sort of to bring it closer to consumer default.
It's more a technical default, right, than it is an actual default.
Because you have the money, but you just don't have it within the budget.
So your budget is out of balance.
So that's what it means.
And the financial implications are, as Dinesh was saying earlier,
the rest of the world looks at your credit rating, looks at your credibility,
looks at your current standing as the global currency,
which I've said very publicly, I think, is starting to come into doubt in the most significant way in history.
And questions whether or not you should be extended the kind of obligations on the kind of terms that the United States has enjoyed from the partners from whom it borrows money, primarily and unfortunately China.
But, you know, I would ask, and I think, you know, Dinesh did a great job, as he always does, is sort of setting the stage.
But are we really surprised that we're here that this happens every time this comes up?
We're in the most partisan environment, I think, in modern history.
We have a current administration that has demonstrated an abject
and ability to understand economics, which is why we have inflation,
where it is, why we have the fastest rate
of increases and interest rates where we have banks failing, things breaking.
I'm not the slightest bit surprised, and it's interesting because I look to what the street says
and what the street is saying, what it's telling us, and things like the VIX and the bond market.
And basically, and we can get into detail on this, but basically, going into the close on Friday, the VIX was reflecting concern about the depth ceiling, but like, not a ton of concern.
Like at all.
Yeah.
Like at all.
Because I think we all know it for what it is.
It's brinksmanship.
It's political.
Horshit.
It happens every single time.
And you can't take Trump seriously.
Oh, you know, risk of the fault.
He's advising.
I forget who it was.
I'm not the first person to say this,
so I don't want to get yelled at for plagiarism.
But somebody got it right.
I was reading earlier today.
He was giving political advice, not financial advice, right?
And I think that's exactly what it was, basically telling the Republicans, you know, to hold their ground to try to get the out of control spending of this administration that, in part, got us into the situation that we are right now with inflation, more in check.
So, Mark, you know, one of the things that I always think about is if everybody thinks, you know, there's like a,
There's this group thing that's going on.
I agree with it.
The markets are not worried at all.
The VIX is still super low.
We haven't seen the rate VIX is even low, which is surprising, comparatively, to what the situation is.
So not just the equity VIX, but also the rate VIX, which is separate from the bond VIX.
And so all three are actually not showing any signs that the market is pricing in a...
a, you know, a Black Swan event.
And so what's confusing right now,
what is incredibly confusing is,
is all of that occurring because everybody has this expectation
that we'll figure us out?
But, you know, if you, if I asked you before the speaker was chosen,
that it would take 15 tries,
to get McCarthy, the speakership, would you have guessed that it would take that long?
That has not happened in decades, I think nearly a century.
And so that's my concern is that this is a new situation where he doesn't have the votes.
Who knows that after all of this work, if they can't get the votes, then what was the point of all these negotiations?
I know it's going to be the middle, but still, it's something to think about, isn't it?
It's very much something to think about, and I think it's the direct cause of the level of partisanship that I, my personal opinion, it's not scientific.
I don't think we've seen partisanship at this level in modern history.
So they are, and brinksmanship is the right attitude, they are going to take it right up to the brink.
But I look at what the smartest money in the room is telling me, right?
And I talk to...
traders at different hedge funds and people on the floor of the exchange where I do some programming from time to time.
And I look at, as we've said, not to beat the VIX horse to death, the market's not pricing in a real probability of a default.
Yet.
Well said, it's a Saturday afternoon, so you're right.
That's true.
I just put that disclaimer in.
Well said, Rob. Thank you.
I guess Black Swans aren't predictable by the very nature.
I'm just going to throw that out there.
I mean, this wouldn't be the Black Swan, I don't think, because it would be foreseeable,
and therefore the markets might panic as we approach the deadline.
But it's the effects of it, of that, even if we run up against the deadline, which I'm concerned about.
If we run right up against the wire, what's the knock-on sort of hangover from just even getting close to defaulting?
Yeah, I mean...
Sorry, go ahead, Donish.
No, I was going to go to Jim next and wanted to get his thoughts because, you know, I know that, you know, at Bianco, you're looking at this and advising your clients.
Jim, give us a sense of what you're thinking about this.
Is the market pricing in the risk appropriately?
Do you think that there is a risk of default?
And just want to first set the stage on what the market is thinking.
What are the people that are putting billions of dollars behind their decision-making thinking?
It might help us get a sense of what is most likely.
If you talk to people in Washington, they're putting about a 40-50% chance.
that there's going to be a default. If you talk to if you look at the credit default swaps,
or if you look at the market, they're putting it about a two or three percent chance of there
being a default. Washington has gotten this wrong every debt, every debt ceiling fight we've had.
They've always grossly overestimated the chances that we're going to have a debt ceiling breach.
So the market is really not taking this seriously.
It expects that there will be some kind of resolution.
Now that resolution may be in a couple of different forms.
It may be that there is a deal next week and we raise the debt ceiling and we're done.
It may be like the Office of Management Budget Director suggested.
We have what's called a continuing resolution.
That's a mini debt ceiling hike.
We just raised it enough to buy another two weeks.
so they can continue to talk and then we do it again and we just kind of dragged this out all summer
we may reach the june 15th quarterly tax payments when you when the estimates are about
150 billion dollars of corporate tax money will flow in and that'll get us to the end of july
so there's a lot of ways that we can kind of get there but right now i agree with the sentiment
that the market is not worried about it but i would say that the market would say
everybody who's always been worried about these in the past has greatly overestimated
the potential of a default and there never has been one and the market thinks that there won't be
one this time now you can tell me that the
Partisanship is different.
The rancor is different.
I get all that and so does the market, but it's just not taking it seriously.
So the risk is that there is, you know, we actually go over the edge this time because they're really not prepared for it.
And so, Jim, another question is something about Danish specifically asked.
Let's say we do default.
And this is with a question that most people have, average Americans.
What will the immediate impact be and what will be the impacts after that,
cascading impacts after that?
Well, there's a couple of things.
And what can the government do if we do default?
14th Amendment payment prioritization.
That was just mentioned a minute ago, that they would pay debt ceiling for, they would pay debt interest first and stuff.
I don't think any of that is legal and I don't think any of that is doable.
Right.
Why don't you think is
doable? Why don't you think is doable?
Because the Congress
appropriates funding.
And if the Congress does not put
specific priority on it, a
A debt, a interest payment or a welfare payment or paying for an aircraft carrier is all equally the same.
And the president does not have the authority to say that gets paid, that doesn't get paid,
or they get paid in such and such order.
He does not have the constitutional authority to do that.
Only Congress can give him that constitutional authority.
The only push back to that, Jim, is that this is not.
about the budget.
This is about the debt ceiling.
And so the only pushback to that could be that, hey, look,
This is about not what we're going to spend in the future,
but what we have spent in the past.
That's correct, and it doesn't matter,
because the president doesn't have the authority
to make that decision.
I was going to say, we've seen this with some of the debt
ceilings that specific states have,
and the state Supreme Courts have ruled that governors can't do this either,
that they can't prioritize unless the legislature
has given them the authority to prioritize.
So, and I'm from Chicago, and we've had this exact argument in Illinois, in the Illinois Supreme Court ruled the same. Now, I know that's not the federal Supreme Court. But I would also go you one step further. You start prioritizing payment, and it would be catastrophic for the country because Washington will abuse that.
As soon as the president has the ability to prioritize payments, oh, everything Republicans want, we don't have the money for it.
They're last in line to get paid.
And then when a Republican becomes president, everything Democrats want, they're last in line to get paid.
And somehow we always run out of money to pay their priorities.
It's an awful president.
And the other side of this, Jim, also, is...
What does that say to the world?
We keep forgetting America's role in the world
that ultimately, as people see us going through this,
this only weakens our global position as the reserve currency,
which unlike Mark and Mark knows I really respect him,
I actually don't think that America is going to lose its reserve currency status.
I think we're going to find our way.
But this doesn't help us.
And if we suddenly say that the president of the United States
can start using money and appropriating cash the way he wants to, I think suddenly the world's going
to start seeing us as a country without laws. And I think that that's a, without a good legislative branch
that actually has some oversight over spending. Because as, you know, many people, including Ray Dalio and others have shown,
that when you let pop,
populism take over, which is what's happening to us right now, if you let populism take over,
entitlements rise. And we're seeing entitlements continue to rise. Both sides are,
are fighting for more entitlements. They're just different ones. And so that's my only concern
right now, more than anything else, is that they're at the table and there's a bunch of things
that have, do not touch, do not touch, do not touch next to them, because we've seen this rise. Nobody wants to be the
the party that fights for austerity and for actual budget cuts, you know, and that's my challenge
right now. And Jim, I agree with you. Sherman, I wanted to, you know, sorry, Jim,
interestingly, actually, the speaker apparently has just made a comment to say that he will not
be renegotiating or opening negotiations until Biden comes back. Yeah, yeah, I mentioned that earlier,
Rob. That was right before. No, no, no, no, worse.
What does that tell you about how seriously Washington is taking this?
I think it was a very political move, actually, and that was finding sort of the politics to this.
My opinion is that the reason why is because it's going to come back and they're going to say,
well, instead of focusing on our country and being America first, Biden was out.
outside the country
when we were supposed to be fighting
to solve this death ceiling issue,
that is going to be the narrative.
And I think that's why they're doing this.
They're like,
we're not going to touch this
until Biden gets back
and takes care of home.
Oh, for sure.
That's the game.
But we're going to come on
to the politics part
because I think that's imperative
to talk about.
But Shire,
is a Shepard?
Sure, Michael, you had your hand up, and it seemed like you disagreed.
So if you did, please go ahead.
But in addition to that, if you can also add on to that, because, again, I understand
in terms of the priority perspective, and we're going to talk about that later.
We'll talk about that as well.
But specifically, how will defaulting affect the average American who's listening right now?
Well, yeah, I was just going to say simply...
before I answer that question as it pertains to President Biden and whether or not he will attempt to use the 14th amendment to bypass Congress.
I mean, these calls are mostly coming from more progressive members of Congress.
the House and the Senate. The President certainly is more of a centrist Democrat, and the White House has already indicated and stated yesterday, and I believe again today, that the president does not have any plans to attempt to do that. I think Jim was absolutely correct in noting that some governors have attempted this. State Supreme Court said they do not have the authority to do so. I think Article 1, Section 8,
of the Constitution is pretty clear that Congress,
the legislative branch dictates how money is borrowed,
not the executive branch, and that's for good reason,
in my opinion.
Now, as it pertains to everyday Americans,
I mean, I think the folks that are gonna be impacted directly
and probably immediately will be government workers.
Those are the career individuals.
And I'm not talking about the folks who are G-15s
who are making $150,000 salary,
I'm talking about individuals who are G-10s and below,
and for those who don't know,
those are the levels or categories, if you will,
if you're a government worker.
Those are people who are making $65,000
and sometimes far below.
Those individuals will be directly impacted.
The military will be directly impacted.
Certainly something that Republicans don't want.
The politics of this...
while the president is out, he returns tomorrow.
So I think Speaker McCarthy saying that we're pausing negotiations for 24 hours is purely politics.
The president will be home tomorrow.
I think they're going to figure this out.
For Republicans, they're looking at this from the perspective of how will Americans
perceive the idea that the country continues to spend more than it takes in without some
litmus test, if you will, or some restriction on this spending?
But,
while articulating to most people, you can't do this at home.
So why should the federal government?
And that's a message that resonates very well with conservative voters and even independent voters.
And so I think Republicans are at least on the right side of the messaging of this.
And when you break down the cross tabulation of the polling data on where most Americans find themselves on this issue,
most of them, including more center-rightlyaned Democrats, say, hey, we want the president to negotiate with Republicans to figure this out.
And I can guarantee that the White House and the political arm of the White House are aware of that data,
which is why I believe that we'll ultimately come to a resolution before time ticks out.
So, I mean, in terms of the 14th Amendment, we did want to come on to a later, but I guess it's so entrenched that I guess we're going to have to open the floor up and talk about it.
Now, just to provide the other side of the argument, because I understand the stronger argument, is that essentially using the 14th Amendment by Biden to bypass Congress.
Congress is going against the Constitution.
But the Constitution argument on the other side is that the 14th Amendment says that,
sorry, the legal scholars talk about this, the 14th Amendment says that in the case of the validity of the public debt authorized by law,
shall not be questioned.
Questioned.
So that can apply to the debt limit.
So essentially the argument is that there is something in the 14th Amendment that talks about the debt of the United States.
And therefore, that can be invoked bypass Congress and Biden can make a decision on that.
So we'll talk about the second.
I'll pass it over to you because you had some questions for Anthony.
Yeah.
Yeah, hey, Anthony, thank you for joining us.
Yeah, guys, sorry, I'm a couple of minutes late.
So you have a question for me, or you want me to give you like a quick review of what I know.
Yeah, no, you know, we've been talking.
I'll kind of catch you up on where we are in the conversation.
So we kind of talked a little bit about the differences between...
this event that's the current conversations in 2011.
We talked about how the market is thinking about this versus what Washington is saying.
And we kind of touched a little bit on the 14th Amendment and how the Democrats are saying that that could be one.
The progressives are saying that that could be one approach, but how Biden hasn't.
You know, as we as we're thinking about this.
You know, you've been in the rooms.
You've seen these types of conversations occur before.
Can you give us a sense of what you think,
where you think we are in the discussion?
Yeah.
So I think we're closer than other people think.
I don't think the president would have left for Asia if he didn't think that he had a construct of a deal.
I think that the 14th Amendment thing is a non-starter.
I would encourage people to read what my former constitutional law professor, Larry Tribe wrote this week.
He's a proponent of it.
The progressives are a proponent of it.
But I don't think the president wants to go in that direction.
I think he wants to negotiate this more traditionally.
I, you know, remember, he's set up now for reelection and every decision that the president's making now has to be seen through the prism of getting himself reelected.
And he has to take centrist positions to get reelected, to really get, as you guys know, these are very tight elections.
Even though he won the popular vote by 8 million people, he only beat Donald Trump by 42,000 votes in three states.
So I don't think he wants to use the 14th Amendment.
In conversations with both Democrats and Republicans in preparation for this Twitter spaces,
They're going to get a deal done.
They will probably accept some terms from the Republicans.
It will upset the progressives.
There's irony and hypocrisy here because you guys know that about $8 billion, excuse me, $8 trillion
was spent during the Trump administration.
And so I just want to frame that for people.
Eight trillion spent during the Trump administration from George Washington to George W. Bush,
seven trillion dollars was spent.
Okay, four years of the Trump administration, eight trillion.
So there's a little bit of hypocrisy here in terms of how these guys handle these things.
You know, they have a tendency to obviously favor their own party.
So I'll just finish up by saying three things.
This gets done before June 1st.
The deal will happen.
It will get signed into law.
You know, someone will then ask, is this a one to two year deal or are they going to be able to pass a budget?
My guess is it won't be.
They'll probably be able to kick it down the road at least for a year.
But this will get done because there's just too much at stake.
You've got a war going on in Ukraine.
You can't bring the global economy to a halt right now.
and not to get into the whole Bitcoin discussion with everybody, but we have weaponized the dollar.
And even Janet Yellen has admitted to people that dollar weaponization last in this year is hurting the dollar standing in terms of its position as the world's reserve fiat currency.
And so you can't bring us over the brink like you did in 2011.
Yeah.
It would have disastrous consequences, and I think both parties are aware of that.
So I'll stop talking now, but I wanted to make sure I jumped on and gave you guys some of the...
No, this is very helpful context.
And just so you guys know, we had White House advisor Anita Dunn at the Sault Conference last week,
who gave us a sense for what I'm saying to you guys.
You know, the only sort of, and I think that you're sort of summarizing what the general sentiment is.
My big question is McCarthy came out and said that they're going to wait until Biden comes back, which is tomorrow.
So it's not waiting very long.
But does McCarthy have the votes?
Does McCarthy have the ability to make this happen, even given how fractured his own coalition is?
And just to add to Danches question, Anthony, he mentioned that Biden is coming back.
You mentioned that Biden's in Asia and he would not have gone to Asia unless they had some form of parameters for a deal.
But then McCarthy's comments when he's mentioning that he's waiting for Biden, isn't that essentially putting pressure on him anyway to say, look, he's in Asia and he's not...
basically negotiating yeah well they see that's why you guys hate Washington and that's why
I could only last 11 days in Washington or 954,000 seconds because these people suck right I mean
you know that they suck right and so they shouldn't be doing this to each other they should be
cutting a deal but we're hard left and hard right for America as opposed to what's right or wrong for
America right now
And, you know, it's astonishing to me that they're doing this to the American people, but this is how they, this is how they operate.
Okay. So it's about personal power and it's about tribalism.
It is not about serving the American public.
Okay.
So I'm not, I'm not indicting one side.
I'm inditing both sides.
They decided that fat tale radicalism nonsense, slamming each other on cable news.
And then gerrymandering, guys, let's not forget to gerrymandering.
Are we in a real democracy if the politicians themselves are picking the voters?
I thought it was the voters that were supposed to pick the politicians.
But we've now screened all of our enemies out of our districts.
And so all we have to do is sit hard right or hard left, and we can stay in power for like 500 years.
I think Chuck Grassley's been in power since George Washington.
No, I mean, I think he's like 500 years old.
Okay, so we're going to do this to each other until people like the 5,000 people on this call,
you know.
I said, okay, we've had enough of this.
We can't do this anymore.
We've got to get a group of people in the middle where we put a slate of people up that are Democrats and Republicans, but they agree on certain things in terms of ways to reform the government.
And that's going to have to come from an entrepreneurial politician because otherwise you're going to have this nonsense going on for another decade.
So they'll do this to each other. McCarthy needs to score points. Biden needs to score points.
Need to set themselves up with their bases and their tribes. But they both know they can't go over the edge.
So I hear you and I hear the posturing, but they're going to get this deal done. And by the way,
Forget about me.
Okay, just look at what the market's telling you.
Okay, Barron's reported this morning, which I totally agree with.
The market is not set up for a catastrophe here because the market participants are on the ground listening behind the scenes and behind the rhetoric.
And the market is sitting there saying, okay, they cannot allow themselves to go over the edge.
Yeah, Mooch, Mark here, by the way, good to talk to you, and congratulations on another great event last week.
We started out the call by talking about percentages in terms of what the market's indicating from the VIX to credit default swaps.
Jim actually gave a percentage that the market is counting maybe a 3% chance of a default.
It's just not being taken seriously right now by Wall Street.
And I think this is Claudia, a voice from Washington to chime in.
So a couple of things with what's been said already.
Like this is different this time.
I know 2011 is a good comparison.
Though I'd remind you, the deadson thing has been raised 78 times since the 1960s,
including twice during the Trump administration.
So and usually with like no fanfare, they just vote, it gets up.
But.
But the thing is, is when we get to 1159 at the end of this month and they're trying to pass it through last minute, the Marjorie Taylor Green and the other people, they're going to not vote for it.
I mean, you saw how long it took McCarthy to get speakership.
And then you've had Donald Trump out there saying, stick with it.
It's worth it, the default.
So I just, I don't think, well, and again, this group of people who have the most important votes is,
still think that January 6th was a, you know,
walk through the capital as like tourists, right?
So these are not people I feel that are connected to reality
and that would be unfortunate.
And then the last thing I'd say is,
with the whole reaction of the stock market,
It's actually making the job in Washington a lot harder to do.
And what I imagine we'll get to is something like, you know, they don't get anything passed by June 1st.
And then the market's tank.
This is like what happened in 2008 with the bailouts.
They tank.
And then two days later, Congress comes back and it's like, oh, yeah, you were right.
And they pass something.
Right.
but they're going to take this one all the way to the edge.
Anthony, what do you think about Claudia's thought process there?
I mean, the one thing I will say is, you know, we were talking about different people,
but your old boss did say that let it default.
So, you know, wanted to get your thoughts on what's happening in Washington and Claudia's concern.
I guess she, I guess Anthony had to drop off, actually.
Wow.
Claudia, I think you may have...
I didn't mean to scare them away.
No, no, I don't think so at all.
I think he just got off.
I actually think Claudia is spot on because, you know, everybody's talking about,
everybody's whistling past the graveyard, Wall Street, as investors are, right?
Somebody alluded to the VIX being really low.
I mean, the VIX has been broken for years, but it's a representation of kind of everybody's thinking
the psychology of the market and where everything is at.
And I think we can compare to 2011, but.
Claudia just said it perfectly, which is you can only compare.
This is not the same.
The country's never been this divided.
And we're coming off a mass pandemic.
We have a lot of issues, notwithstanding just the debt ceiling that needs to be raised,
other things that are happening.
So, you know, I think the politicians in D.C. are going to do their best to keep the โ
how do I say the
both sides as polarized as possible
because they're going to blame each side's going to blame the other
and remember we're headed into an election year
I agree with what she's saying
okay but who wins in an election year
but that's what I want to know no one wins right no one
right so why would they say what about the black swan
the black swan everybody's looking for the black swan
you're not going to find it right you can't look for black swan
it's coming it's going to come out of nowhere and i think there's a distinct possibility that we
do get a default this time around only because of how polarized everybody is on all these
i agree with ohair it's really a unique situation it's a very unique situation it's not just it's not
just i think that scaramucci made it seem like this was a done deal and i frankly do not think it's a
done deal at all i mean though
the Bernie Sanders letter from last week with 10 congressmen signing saying that,
hey, we think you can use the 14th Amendment.
I mean, the Chamber of Commerce said you can't use the 14th Amendment.
It's almost the same as defaulting.
I mean, has anybody read the 14th Amendment?
This thing goes back to the same.
Exactly.
I mean, it's not.
It's not.
It's not.
I mean, you know, I think it's crazy.
I think we're crazy.
I think we're closer to a...
you know, a pretty significant.
There's two types of defaults, right?
There's a soft default and a hard default.
I think we're more, in my mind,
I think we're more leaning towards a hard default here.
And it may be, obviously, it's going to be temporary.
For the listeners, what is the difference between a soft default and a hard default?
Well, the soft default is we just kind of, we do what we did in 2011.
Well, certain parts of the U.S. government are shut down.
Payments are stopped with certain branches of government for, you know, temporarily.
Debt gets, you know, downgraded.
I mean, you know, that's kind of a soft default, right?
Payments are being prioritized.
A hard default is where we don't come to any conclusive...
you know, end, and we just keep bickering and nothing gets done.
And I think we are probably more closer to that scenario than we are like a soft scenario,
only because, again, I mean, look at what happened.
The Republicans and the Democrats have never been this polarized.
I mean, the nation is literally divided, and we just went through a pandemic.
And we just went through a pandemic.
everything that Trump has done over the last couple of years had not helped. I think Anthony's,
you know, Anthony wants to play, you know, I like what he said. And I think that's, he wants to play
the sober participant here that everything's going to be okay. We're going to get this thing done.
But, you know, I just, the fact that McCarthy took that long to get, you know, to get put into
his position on the part of the Republicans tells me, even the Republicans can't get
you know can't get it together i mean this is this is going to be
uh one for the ages i i i truly believe that and i think again looking at the vix
looking at the stock market it
You know, you can't look at it and say, okay, everybody's okay with this because the stock market's okay.
The yield spreads are okay. Everything's fine.
So the last one's come out of nowhere.
By the way, I wasn't suggesting, and I started out by acknowledging the historic polarization
and acknowledging all of the political conditions that you rightly point out.
And I'm not suggesting that the stock market is saying, everything's okay, everybody's going to be okay.
It's just a matter of people that have been at this for a long time, managing substantial amounts of money,
recognize and understand partisan brinksmanship,
recognize and understand the consequences of a default,
and believe that cooler heads will ultimately prevail.
While I'm not as optimistic as Anthony, who's a good friend, I do think that we're going to get through this.
Mark, listen, I understand that.
But listen, the smartest guys in the room always are the smartest until the day they're not.
And if you look at back, I'm just going to throw out something like similar, but not, you know, obviously it's totally different.
It's like long-term capital management.
and the Russian default, right?
The smartest guys in the business were managing this, this fund, and it blew up.
And so even the smartest people, even the smartest folks on Wall Street, right,
the people managing billions and billions and hundreds of billions of dollars,
all of us participants on Wall Street, we can get it wrong and we do often get wrong.
Totally.
So just because it doesn't, just because the,
Just because it looks okay right now, it could be the, you know, the calm before the storm, because we don't know what's going to happen until it actually happened.
Oh, yeah, let me ask you a question on that. Let me ask you to, so because your argument makes sense to me. Like there will be a scenario where these both sides won't negotiate and it's going to get down to the wire.
and it's what Claudia mentioned.
It makes sense to me.
But in terms of the demands of the Republicans,
I mean, you look at it,
they've got work in time and demands.
They want to recoup some of the COVID money.
They got, so there's various demand spending cuts.
So the various demands they've got,
which demands you think are going to be the ones
that are going to take us down to the vibe?
Prioritized?
Yeah, that's a good question.
I have no idea.
But going back to Claudia's point,
I think Claudia is absolutely spot on here.
We cannot compare this to any other time frame.
I mean, just two weeks ago, the former president of the United States was on CNN,
still claiming that the election was rigged.
Okay.
I mean, listen, guys, this whole thing, and I know.
But he's not in the room.
Just to be clear.
I agree with Mark.
By the way, I agree with Mark.
I think, you know, you have to make a case that Wall Street, you know, that the, you know,
the participants on Wall Street, right, all of us collectively.
are making the bet that things will get worked out.
They always do.
The problem is they always do until they don't.
And we don't know if that time has come
or if we can kick the can proverbial can down the road again,
like we have been so many times before.
I have not seen this much...
you know, resentment on both sides.
I mean, literally, I just don't know
if they can get done this time around
without some serious...
But both to lose, don't me ahead.
I'm just going to ask a question,
so both lose in the event of a default.
So what we're saying is,
Are they going to continue to sort of temporarily extend this thing and kick it down the road to six, 12 weeks at a time while we're talking about a default?
Because I think that's important. I don't think we're going to see a default on the 1st of June.
I think you're probably right. In that scenario, it seems to me this is going to take all summer and they're just going to keep on kicking the can.
That seems to me what the market seems to be indicating. I don't know what your view on that is.
So Dr. Danish, you know, you said Donald Trump's not in the room. The issue is that when it comes to the Maga movement, they have influence on Congress and they do have a significant input from that regard.
But to be fair, when you think about who McCarthy has in the room, the issue that's occurred, and again, I do think that the
that there is a political narrative that they're trying to develop,
which is that, hey, I had my middle of the road Republican guy in the room.
That's his deal maker.
That's in the room right now for him.
But on the other side of the aisle, the people that are negotiating are actually from OMB and I can't remember her name.
But, you know, she's not known to be very much center aisle.
She's known to be a little bit of a progressive.
And then Biden leaves.
And they're saying that they're no longer negotiating on specific items, you know, something.
the timeline and so on.
And I think that's where things are getting a little bit more hairy.
Joseph, you know, I saw that you raised your hand.
I wanted to go to you.
I saw that you put up your hand when O'Hara was speaking.
I wanted to give you a chance to weigh in.
Oh, yeah.
Thanks so much for having me.
First, I like to mention that I think you guys are not taking payment prioritization
as seriously as you should.
Because as I, well, first of all, why is the market so complacent?
I think the market is complacent.
regardless of what you think of the politics it's because they know that at the end of the day
there is a plan B which has been well understood by the markets so the house financial services
committee subpoenaed documents from the new york fed and they found out that the fed had a plan
and that was to prioritize payments now i'm totally aware that that's probably totally illegal
but i think if you look in that report you'll find that
there was someone in a meeting with Cherpao taking notes down about what Chair Powell thought about the legality of this.
And what's written in the documents is that Chair Powell thought that, you know, he doesn't
really care about the legality of it because eventually his thoughts were when someone was
aggrieved and goes to sue in the courts, by the time they actually make it through the courts,
you know, all this will be said and done.
And so from the Fed's perspective, remember the Fed has a financial stability mandate.
This is something that they...
that was within their mandate and it seems like Sherpao is okay with the legal aspects of it.
Now, if you take that into account, then the market is rightly very, very, uh,
sanguine about the prospect of a default on U.S. Treasury securities.
But Joseph, if not a payment prioritization, can you tell us, just from your knowledge,
you know, what will be prioritized?
That's the soft default. That's the soft default.
No, no, I get that. I just want to get a little bit more details on what gets prioritized.
So first and foremost, obviously, treasure securities get prioritized. So,
The way that I would think about this is if you have defaults on trade securities,
there's tremendous amounts of uncertainty from the plumbing of the system.
You can have, for example, a lot of people make loans taking treasuries as collateral.
This is the repo market, very huge, very deep.
Now, there is some uncertainty as to whether or not lenders would be comfortable holding defaulted treasuries as collateral.
If they don't, they know, there's a lot of, it's the big scary Pandora's box of the unknown world.
It's the same for, let's say, lots of investors who have very strict mandates may not be able to hold the vaulted securities.
Will they be forced to sell, or will they get an exemption from their board?
And what happens if they sell? Sorry, I want to start painting the picture.
Go ahead. What happens if they start? We all agree. Let's be honest.
Actually, my sense, actually, the way that you look at this, they would probably get some kind of exemption from their board.
Right.
overboard that governs them so that they can continue to hold it.
So that's my sense, but you don't know.
And anyway, this is beside the point because it's never going to happen,
not just there's just so many little tricks that they can do to create more room
and to keep the game going.
So I think the financial markets are rightly...
rightly not worried about the default at all.
However, that doesn't mean that there isn't any real economic impact on this.
In the event that we do go to payment prior authorization, some people somewhere are not going to get paid.
Now, I think it's obvious that we could think that, say, Social Security, they're going to get paid, politically powerful, very important people, let's say, or veterans, Medicare, all that will get paid.
Who's not going to get paid?
You know, it's going to be a political game, I think.
I suspect that it'd be these big corporations, maybe like, say, a big military contractor or something like that.
So they're going to go without until the debt ceiling is resolved.
Now, I don't actually think that's a big deal.
I'm sure Lockheed Martin can, let's say, survive for a month or two without getting there billions of dollars.
So that's not a big deal.
What will be a big deal, though, is what it takes to ultimately get a lasting compromise.
And that could have lasting impacts.
in the sense that there could be deep spending cuts in order to get that resolution.
And so I think that's what I would focus on rather than this process.
And I also want to make a comment about the sense that, you know, the U.S. is not being managed well
until people are not going to hold our debt and so forth.
I don't, I'm not worried about that at all because, I mean, let's think about this from, let's say, China's perspective, that as we all know, China holds lots of treasuries.
Now, the U.S. is just already openly, you know, poking the dragon, sending all these people to Taiwan to hug Taiwanese leaders, basically waiting huge trade war.
They're already doing a whole bunch of stuff to kind of have hook the dragon.
Now,
The Chinese don't hold treasuries because they're our friends.
They think that we're great.
They hold them because they have to.
It's part of a prudent reserve management.
It's part of being part of the dollar system,
which they need to be a part of to conduct international trade.
So it's not really about us.
It's about them.
So I,
I don't really worry about it.
And they will always act in their self-interest.
That's something that we were saying,
when SVB happened and people started talking about bricks
and all of that nonsense,
it was just like,
I don't think they understood the bigger point,
which is that China will always act
in its best interests and a strong U.S. currency and, you know, a strong U.S. at some level,
or the Treasury's being strong, at least, would be in our best interest.
Jay, I wanted to give you a chance to jump in.
Yeah, sure thing. Thanks for organizing this. I'm sure a lot of people are worried.
I was actually at a dinner on, you know, with, you know, and two elderly ladies are sitting
across from me, and they're talking about their social security checks, and people are
talking about it. I think the...
I think the issue, their social security checks, the issue is not just are they going to default.
The issue is much bigger than that.
It is eventually we are going to honor our debts.
There's no question in anyone's mind that that is going to take place.
The issue is that if you look at what happened in the past, you know, we've raised 78 times since 1960.
That's understood.
But if you look at the setup in 2011...
I think that if we were to have a soft default,
you would follow, whether it's legal or not,
a priority of payments that cutting contractors is not enough, right?
Cutting payments to contractors is not going to, you know,
create enough wiggle room for us, you know, through July.
What you are likely going to see is you're likely going to have to cut a little bit of Social Security,
Medicare, Medicaid, other entitlement programs.
You'll likely have to cut a little bit, you know, potentially could cut spending to,
the military you potentially could cut you know u s postal service
uh... payments and whether it's one week two week three weeks
that could have a material effect on consumer confidence.
There are 3 million employees that work for the federal government.
And broadly, there are 18 million people that work for, you know, the federal government and state governments.
And when you include contractors and defense, now you have almost, you know, 25 million people that are tied to, you know, the government.
in terms of how they're paid.
And that is a non-material number,
and everyone's going to be thinking about,
okay, when am I going to get my check?
How am I going to make my rent?
How am I going to buy my prescription medication?
So it's not just...
Hey, this is, you know, we're not going to default in our debt and these two political parties are going to agree.
You know, one, they're having a very difficult time getting to agreement and the tweets that you saw in truth social aren't really helping that.
Number two, it's not just, you know, whether they get to an agreement, there has to be a vote, right?
They can verbally agree.
You know, the White House can verbally agree with McCarthy, but then it needs to pass, right, the Senate and the House.
And that could take several weeks to play out.
And, you know, the way that we're going right now in terms of how consumer confidence is set up and, you know, how tight the TGA balance is, you know, we could get to the very last day. We could get, you know, past the X day. I don't think it's June 1st. Like, you know, Yalan is obviously has an agenda, but it could be, it could be within the next several weeks.
And we're already in a situation where we have anxiety over the banking system, over war,
over, you know, potentially inflation coming back with energy prices at the end of the year,
and declining earnings with peak margins, you know, 18 months ago.
So I think it's much bigger than that.
I think the market's being extremely complacent.
And, you know, obviously if you have someone running a big fund, they're going to want this to be smooth.
And frankly, I think there's a chance that it's not smooth.
You know, with the VIX at 16, I think it's ridiculous.
Yeah.
You know, Craig wanted to bring you into the conversation.
Thank you for waiting.
I know your hand is enough for a while.
It's just a quick announcement.
Sorry, I do, probably, guys.
If there's any comments, please put your comments in.
We've got an amazing panel.
We can ask those questions to the panel.
On the right-hand side corner, any comments, please do.
And we will be having Patrick David, Patrick Bet David,
join the panel shortly.
So watch out for that, and it'll be brilliant to have them on as well.
Sorry, go ahead, Dan, thank you.
No, thanks.
Yeah, you mentioned just a lot about the VIX and lack of panic,
but it is important to recognize that the T-Bill market actually is starting to panic
in some ways. I mean, you know, T bill yields,
T bill yields for May 30th are yielding about 3.9%.
And then for June 1st, they're up to 5.4%.
And they kind of remain up at 5.4%.
They're at 6% on May 4th when they issued 50 billion out of bonds.
Yeah, no, look, I mean, I understand that was for the June 13th expiry, right?
So we're, you know, these are, these are yields that are a bit higher.
But I think it's important to recognize when we could forecast the TGA balance, you know, daily.
And it really doesn't look like we're going to trigger...
you know, a zero level in, you know, really any time before June 15th, I mean, my record,
what I'm looking at here is levels of about 20 billion, which is uncomfortable and certainly
on the low side, but it is not zero. And so to the extent that that is the message that is
being sent kind of inside of DC, then once we, and Jim made this point earlier, once we get to June 15th,
we bring in a pretty sizable amount
of corporate tax payments.
And then once we get to June 30th,
then we get extraordinary measures
that Treasury is allowed to use again
in order to create more cash management bills,
which will give them another four to six weeks of room.
So if that's the thought process that's going around in DC,
where this is posturing, let's say, by the Treasury
and a fictitious June 1st date,
then really neither side has a strong need to kind of get a deal done imminently.
And if the markets aren't going to do any panicking now, then what's really the point?
So my sense is...
you know, there is some, you know, some risk in this second week of June.
But once we get to June 15th, we're tabling this issue kind of mathematically for another six weeks.
And so I think that's probably part of the reason why, you know, the VIX is not,
hasn't really been out of control.
But I certainly think that's why the far right and the far left,
are both sitting back and saying,
we're not dealing very aggressively off of our red lines right now.
What is really the point?
You know, one thing I was going to say, by the way,
for Anthony, for the mooch, just want to let him know.
It's okay.
It looks like you're glitching, and he's trying to come back up,
but he's having some trouble.
But you were great.
Thank you so much for coming up.
And if you can come up, we'd love to have you.
Go ahead, O'Hare.
Well, I was just going to say to Craig's right in saying this.
I think one of the things that,
kind of is is being missed here is the fact that, you know,
rates are much higher now than they have been in the last, you know, 13 years.
So the previous, you know, debt ceiling cycles were much easier to kind of address than they are now.
I mean, we've had a 500 basis point increase in interest costs for the U.S. government.
So, you know, it's becoming exceedingly more difficult at the same time that we have this, like, wedge between both parties.
I mean, you know,
This could be, in my mind, that moment where, you know, we wake up and it could be that
black swan.
This is all coalescing all at the same time here, right?
This is all, it's a very interesting time, and it's a very scary time in my mind because,
again, interest costs are not going down.
They're going up at the same time that debts are going up.
So there's a massive amount of leverage that keeps building.
And at some point, that pot probably will boil over, you know.
I mean, it's interesting.
Sure, Michael, we'd love to get your thoughts on this.
I mean, it seems like everybody else is now,
we got a second side of this, which is that cool heads will not prevail.
It kind of goes against what you said earlier.
I would love your retort.
Yeah, I mean, I think Claudia raised an interesting point when she noted Marjorie Taylor Green, Lauren Bolward, Matthew Gates.
And there are a few others within the Freedom Caucus who are extremely conservative.
And their voters, their base are Donald Trump's base.
Right.
And I certainly think that Trump complicates this issue in ways that we have never seen in the past.
And I think we have to consider that.
I think it's a bit unfortunate from my perspective, as a political strategist,
haven't worked on several presidential campaigns, that the market isn't panicking.
I would argue that some level of market panic now would actually be good in pushing leadership in the House to try to coalesce their members by whipping enough votes to make sure we come up with the deal.
Now, I want to remind everyone.
Kevin McCarthy had a very difficult time getting the Republican votes necessary to come up with what they have released to the public. And so that tells me that he really doesn't have a significant amount of room to negotiate with the White House. If he does, he's going to lose support. Now, can he in turn...
work with the minority leader to get some Democrats to vote with Republicans who are in some conservative districts.
That's possible. I don't see the political advantage for Democrats in doing so.
And so I think Trump continuing to pressure Republicans will in turn force the base to put pressure on Republicans to say, we don't want you guys.
booting on any type of a compromise here with Democrats.
And so I think the idea that we may indeed get to a soft default is very realistic here.
My hope is that we will not get to that point.
But again, thinking about the possibility of some members holding out at the very last minute
is something that we absolutely have to calculate as we assess this.
And again, if you're looking at a Lauren Bowdover to Marjorie Taylor-Green, those individuals โ
do not have any reason to vote with the speaker.
They have every reason to vote against the speaker
on this particular issue.
So again, I am of the position.
If I'm a market player here,
if I'm over a big hedge fund,
or if I'm over a big corporation,
I would probably want to get those guys together
and say, hey, we need to start releasing some statements
to put pressure on House Republicans.
because the ball is ultimately in Kevin McCarthy's court here.
And if they don't do that, I think it'll be too late,
and we will indeed reach us off default,
and we'll start having conversations on what do we prioritize in regards to payments.
Is that Medicaid?
Is that Social Security?
Are we looking at disability benefits for veterans?
I mean, these are realistic conversations that I think we cannot overlook
because of the complications of the politics here.
And Shemichael, what you said and what Claudia said, I'm going to pass us over to Claudia because she's highlighted issue.
And essentially it was this.
And what you mentioned in terms of McCarthy's role is very imperative because, as you said, he did not get elected easily by his own party.
You know, Matt Gays, what?
and Boba held out for a significant period of time.
Yep, there were a significant amount of votes to try and get him elected.
So it means these demands that he's got are actually very important.
And so it means that you're quite right.
And most likely it's going to be the case that we're not going to have a deal for a while.
And it's only when it impacts the market.
So my question is this, Claudia, because I know you want to add to this as well and jump in.
My question to you is,
When will we start?
Because someone said there's only,
the market's only been impacted
and shows the impact of 2 to 3%.
So when are we going to see,
at what point are we going to see a significant impact on the market?
And then please add whatever you wanted to.
Yeah, no, I think we see a significant impact in the market when they don't manage to pass the bill to get the deep, avoid the default.
Right.
I don't think, again, I think Lehman is a good example of this.
They had TARP, or this was a little bit after Lehman, TARP went up to the Congress.
Congress voted it down and the markets tanked.
Right.
Right. So at some point, the markets do pay attention, right? Like I believe they do, but I think it's going to come too little too late. And absolutely from what was said before, it would help out in DC a lot if the stock market were unhappy because that's something that gets their attention. But yeah, so we'll see. And I actually think we should, you know, there's a lot of discussion about what happens if we go over the edge. I think we should also have a discussion of what happens when we get really close to the edge.
Right? Because that's also a sign of like we're not a functional country. We can't get this done.
So a couple other points that I did think were worth making. So you all have talked about the prioritization a couple of times. And that was something that was kind of a hypothetical put together in the Obama administration as best I know. Janet Yellen has been adamant that they cannot even do prioritization.
And I mean, the tech systems in government are pretty sad.
So it wouldn't surprise me if it's not possible.
And then for those political reasons, it would be absolutely insane for them to try and list order who's more important than who in terms of getting.
So I think they just, you don't prioritize.
You can say you can only send out 70% of the payments.
That's just what you send out.
Right.
So you won't get everything, but you'll get something.
One other thing with McCarthy, the bill that passed the House,
Those budget cuts are enormous, right?
That legislation is not even connected to reality.
It ends up being almost 20% of discretionary spending on average over the next 10 years.
I mean, there's no way, right?
So they didn't start with a reasonable bid.
But, I mean, it makes sense.
Game Theory is strategy.
I get it, you know, whatever.
Then the last thing that was said before is I think the context is something very important.
you know, we are not, our economy is not in a rock salad kind of good place right now.
And so, and we've already had, you know,
Fed hikes raised 500 basis points.
We have banking turmoil.
And now if we have a default on the U.S. government debt,
it's like at some point the labor market gives.
So I think to me, this could be the event that pushes us into the recession if it happens.
But, you know, I am actually, I'm not optimistic about this getting done.
Yeah, I mean, it makes sense that this would be an event that accelerates the possible recession
what people are afraid of towards the end of the year.
I mean, Jim, my question to you is this, just to move slightly more towards the political aspect,
When you look at some of the demands that the Republicans are making and I have been through them,
they seem very much politically oriented.
And so then the question becomes, who's going to fold?
Let me give you an example.
You've got a scenario where one of the things that the Republicans are demanding is that
this cuts to Biden's.
climate change in legislation.
So obviously, Republicans believe that there's too much money
being wasted in this climate change agenda
when average Americans are struggling.
So now, I can't see, and obviously Biden believes that's very important.
So who would actually fall in that scenario,
especially when you got McCarthy receiving pressure
from his Republican Party, from Matt Gays, from Berber.
So I'd love to hear your thoughts on that.
And then I know you got your hand up, so just add whatever you want.
Yeah, before I get into the politics, I want to echo something that Claudia just said.
The Treasury has made it very clear.
There is no payment prioritization.
They don't have a system to do it.
There's only one type of payment prioritization they could theoretically do.
They could pay bondholders.
That's it.
But then after that, the federal government pays millions of people every day, whether it's employees, it's benefits, it's vendors.
Millions of checks go out every day.
They cannot prioritize.
Lucky doesn't get paid.
What it is is if we pay $20 billion of...
debt payment or $100 billion of debt payment. The next $100 billion that happens to be in line,
even if it is money to widows and orphans, don't get paid. They don't have a system to do what we
think that they want to do. They can't do it. They can't. Hold on a second. Jim, they can. What they'll do
is what they've done in the past, which is they'll prioritize government employees that
that are non-essential.
Like, for instance,
national parks.
You're confusing a budget shutdown.
Exactly.
Government shutdown with debt ceiling.
These are two different things.
They are.
It is illegal to do what you're talking about with a debt ceiling.
Right.
They can do it on a government shutdown.
This is not a government shutdown.
I know,
but you don't think that's where we're going to go if that happens?
That's exactly where it's going to.
We'll go there at 12 o'clock.
At 12.05, there'll be a brief at the Supreme Court at 12.10.
It'll be shut down.
That's where we'll go.
They'll put an injunction on it within 10 minutes, and then they'll argue about it.
So just assume we're not going there.
There's only one fix to this, only one.
And that is you've got passive bill and you've got to raise the death ceiling.
14th Amendment.
14th Amendment, I'll be happy to talk about this later.
The 14th Amendment would make things worse than a default because that debt would be unsure whether or not it is valid.
So if you bought 14th Amendment debt that's issued after the 14th Amendment and the Supreme Court rules that's invalid, you lose all your money.
But then, what are the chances that the Republicans?
I also reject that.
I think the problem right now is the Democrats.
You guys are all pounded on the Republicans and they deserve it, but you're not remembering what happened here.
The progressive wing of the Democrat Party is going ballistic on Biden for even negotiating.
That's why they put a bill up or that's why they signed 66 and signed a letter to go to the 14th Amendment.
They are going to go ballistic on their own party.
And that's why if you read the political today,
I'm talking about a story in Politico,
that the negotiators for the Democrats are going backwards
because they're getting so much heat from the left-wing side of their party.
The chaos right now is on the left side, on the Democrat side.
So, Jim, Biden takes, Biden takes any negotiating.
Just kind of, let's continue the conversation.
I was going to say that, you know, the other side of it is how much of this came up when Trump was adding to the deficit?
It didn't.
It didn't come up with Trump.
Oh, it didn't.
So suddenly this is so important, but nobody was worried about it when Trump was in power?
Well, I don't understand what the question is.
I mean, that suddenly this has become top priority, but when Trump was in power, it was not.
And again, I don't like either of them.
I actually personally dislike both of them.
But my point is just that...
By the way, what was the last...
Does anybody remember what the last that ceiling fight was?
It was actually December...
Yeah, it was for Obama.
Yeah.
No, it was December of 21.
It was 18 months ago.
And the reason that it didn't come up then is because for the same reason,
it didn't come up with Trump.
We had all Democrats.
And it was just Democrats negotiating with Democrats, and they cut a deal and they passed it.
This happens all the time.
As it was pointed out before, 78 times we raised the debt ceiling.
And we ran the TGA down to $40 billion by December of 21.
Go back and look at the chart before we then pumped $700 billion into it over the next six weeks.
in the early 22.
So this happens all the time.
I understand we want to make this a Republican fault.
And they are not blameless here.
But the other side is having its own problems too.
The Biden for 90 days said clean debt ceiling bill,
no negotiation.
He caved on that, and he's getting a lot of blowback from his own party.
Now, maybe you think he should be getting blowback from his own party.
The problem right now, as it stands on Saturday night, is that Democrats are not unified.
That is not, that is, that is, that is, that is, the problem is not McCarthy.
It could switch to him again.
But right now, that's where the problem is.
And the only way out of this,
the only way out of this is a deal.
Is no, no prioritization.
I agree.
I agree that a deal is the only way out of this.
Yet, the, the, the, the,
You know, essentially the head of the Republican Party, who is not currently in power, but he does represent...
You're overstating his power.
I understand.
Hold on.
I understand.
Jim, let me finish my sentence, my friend.
Hey, can I just finish my sentence?
And then you can continue to shout into the speaker, but I was going to say that, you know, ultimately he did come out and he said, we're going to hold the line.
We're not going to give in.
And on stage with Kristen Collins, he did say that we want to default.
It's not a problem if we default.
It's okay if we default.
And again, that means a lot coming from him.
And it is of no surprise that right after those comments, you know, a lot of these changes have occurred in posture.
So I think just acting like this does not matter at all.
is also incredibly foolish.
So I want to be sure that, of course,
he's not running the Republican Party,
but he is clearly having a say.
And so, you know, I want to make sure that we do acknowledge
that both sides are at fault at this issue, like you said,
but I will say,
that the Democrats should have been negotiating this whole time.
I think that Biden should not have left
for an international trip in the middle of negotiating
a debt ceiling.
I think that they should actually budge on certain priorities.
But to kind of say, oh, Republicans aren't,
you know, we have like these tiny little faults
and nothing's wrong with us.
Man, Trump just came out and said all this ridiculous stuff.
And so I do wanna be thoughtful about the fact
that stupid things are being said on both sides.
I agree. I agree that stupid things are being said on both sides. But yes, Trump said something ill-advised. This is just a news news story. But I would just basically remind you that McCarthy is the leader of the Republican Party right now. Not Trump.
Barely. All right. Like a very weak leader, to be honest.
But he is.
And then let's talk about the leader of the Democrat Party who said for 94 days he wasn't going to negotiate.
Now he is and he's got his progressive wing all over him for even bringing up the idea to negotiate in the first place.
So he's got problems on the other side.
So this is not just...
So Jim, you're just making the argument that Claudio is making, which is this is a really crappy situation.
Yeah, it is, and it will get, yeah, it is a, it is a crappy situation.
It is a crappy situation.
So the risk of default is higher than you were originally thinking?
This is exactly, exactly.
I don't think.
No, I'm just leading you down this.
Jim, just, you haven't been on stage with me.
I do this all the time.
I apologize, but go ahead.
No, no, no.
It's perfectly fine.
It's perfectly fine.
It is a crappy situation, but all negotiations are.
Every negotiation looks intractable until it doesn't.
And at some point, look, if you want to go to the debt ceiling fight,
I'm sorry, the budget fight in 2013 when we shut down the government for 17 days,
and all of the brightest minds in Washington said we might never reopen the government again,
they invented a word called sequestration, and they found a deal, and they got it done in 24 hours.
They will invent a word.
They will find a deal.
Everybody will take credit and they will get this done.
They have no choice.
That's what, that's Wall Street's term.
They have no choice.
They have to get this done.
And right now, all I'm saying is the problem is, it's actually...
more likely to get a deal because the problem is on both sides and that both sides have problems
it's not one side leaning on the other side they will find some way through they can i i micrathy
was right a couple of days ago when they want to make a deal they'll have it done in 24 hours
they can when they want but they're just not there yet now maybe it's because they think the debt is
is going, the actual X date is going to make it to June 15th and then push it out to the end of the summer.
Maybe that's why they're so lack of the days ago about this, because they all know that they actually have another two months.
And they, and it's not going to ask a question on the start.
Or maybe they're posturing because they know there's not going to be a deal, hence McCarthy's comments.
Yeah, but that's just raising the debt.
But let me ask you, Jim, what about all of the pork that's going to be put into this bill?
What about all the extra spending that both sides are going to want to have?
I mean, this is going to balloon the deficit even more.
And at a time when we have a higher cost of capital.
I mean, this is a really big fucking problem.
A lot of people are really talking about.
you don't know i mean it is it is but we don't know what this we don't know what the final form of this
bill is going to look like in terms of what kind of spending cuts and where the spending cuts are
going to come i agree with claudia we're not going to get we're not going to get what the house
passed but then we were never expected to get what the house passed that was just an opening gambit
is all that was and
And now, so I don't know what we're going to wind up with at the end of the day.
I don't think anybody knows what we're going to wind up at the end of the day because once the mind is focused to make a deal, you're going to see things move very quickly.
Maybe at the end of this week.
maybe it's the end of July, depending on when we hit the X date.
But when we get to that point, I think things will move very quickly.
And then we'll have to assess what kind of a deal we wind up with in terms of the spending.
But you're correct in terms of the amount of spending in the size of debt is getting to be a big problem.
And the amount of debt...
interest payments. Look, interest payments just passed the death defense debutsche in the last couple of weeks.
And it's going to keep going even if the Fed were to start cutting rates next week. Not not, not, but even if they did because of the roll off of the lower coupons with higher coupons, we're going to continue to see debt interest payments continue to skyrocket at least for the next 12 to 18 months.
So, Joe, I wanted to go to you.
Thanks, Jim.
Joe, you know, I was kind of, we were kind of talking about this issue about two weak
leaders.
I kind of led Jim into that little trap that I was trying to do.
But Jim did great.
But I was going to say that, you know, there are two week leaders.
And both of those weak leaders have poor coalitions.
You know, Biden has to worry about what the progressives think.
McCarthy has to think about what the Freedom Caucus thinks.
And,
And so, Joe, you know, my question for you is, doesn't that slow things down more than speed them up?
Yeah, of course it does.
And, you know, we talked about this last week and I said,
Look, the only thing I think this is is posturing, right?
Like right now, everyone's majority of the people.
The American sentiment is it blames the White House for not fixing this.
So Republicans will hold out the position for election, right?
Because all of a sudden we have a lot of politicians that I feel like they do nothing but market for the entire four years until the election cycle.
It's absolutely ridiculous.
But now, if you look, last week, a lot of the news articles was blaming the White House.
All of a sudden, the Democrats have turned on their marketing machine, and now it's about there's blame on both sides or the Republicans are holding out and things of that nature.
And polls have shifted as well.
Now, 40% of the country says they'll blame the Republicans and 37% say they'll blame Democrats.
So things are starting to move in terms of opinion.
And that's when I think...
will finally come to a conclusion when they see there's not going to be a win here for them.
Yeah, it's fascinating.
Doc, I wanted to bring you in.
I know that I said a lot of things about Trump,
and I wanted to give you a chance to respond.
I know how you feel about him.
And I wanted to give you the opportunity to tell me why Trump, again, is the savior of the situation.
Go on, Doc.
Tell him how he's wrong.
Well, you know, I don't think I'm going to approach it from that standpoint.
I want to put a different lens on this.
It is a political lens.
But I don't think that Trump is really a driving force here. I think the driving force is Biden and the progressives. I think that McCarthy, I agree to a certain extent that Trump's presence is important only on the impact it has on McCarthy and the tenuous grasp he has on the conference. One of the bills that
part of the return to normal rules was that there's a single member can bring up a vote to vacate
the chair and remove the speaker. So whether or not that would happen is one thing, but it would be
political disaster for McCarthy if his own party in the Freedom Caucus turned on him.
So I really think any movement, it has to come from the progressive side, has to come from
Biden. And my fear is that he doesn't want it.
that they are looking to this shutdown in the same way that other people in the room were analyzing and comparing this potential shutdown with shutdowns over yearly budget negotiations.
I forget who it was.
I think it was Jim was mentioning this path to this shutdown does not flow through the House, does not flow through the Senate.
It flows to the Supreme Court.
And I think Janet, I think that's right.
Janet Yellen's...
the hands would be tied, Treasury's hands would be tied,
and there'd be no disbursements out to the executive branch
to sort of mollify that part of the crowd,
which is normally mollified in the yearly budget breakdowns,
because Medicare is still paid for, welfare payments are still paid for,
the military is still covered.
But that technically should not be the case this time if it breaks down.
That is assuming, I think it was...
I don't see him in the room anymore, assuming that there is a legal response to the shutdown.
And there's ever reason to think that even though the law requires and the Fed Bank rules require that there be no disbursements,
that disbursements would be ordered and made nonetheless.
So my question for the group, and I really don't have a firm grasp on this, is,
If I is a Trump supporter, and I firmly believe this, that Biden is compromised by his past relationships with China.
And I take as evidence the fact that Congressman Comer in the House produced bank records from a Chinese bank that Hunter Biden did business with.
And apparently they also have a phone owned, a cell phone, owned and...
Doc, just when I was thinking, I was like, wow, what a nuance take from Doc?
And then suddenly, keep going.
I'm sorry.
But that was surprising.
Yeah, I know you're poking at me.
But look, there's every reason to believe that Joe Biden's compromise.
And not just the Comer report, but you can look at the Durham report, which held that before the resuscate,
and the Steeled memo was released by McCain into the House and the Senate,
that O'Biden, Bama, Komi, and Pelosi were all briefed on the plan.
So I think this is...
been long planned.
Doc,
can ask you a question on this?
Yeah,
I'll answer to me.
I'm worried about China's reaction.
Now, I want to ask,
I want to ask you another question, though,
specifically on this.
So, and I think you'll give me a good answer.
So essentially,
you've got a scenario where both sides
are standing firm on their position.
One of the,
and I'm asked this to Jim as well,
but I'll ask you because I don't think
he had time to answer it.
But it is that what essentially we know, as much as we want to not talk about it as much, there are certain concessions that the Republicans want.
And some of them seem appropriate and some of them seem quite maybe, maybe less appropriate.
But one of them, as an example, I'm just using this highlighting it because it's such a like,
political difference in terms of this.
It's a more ideological, this one.
And it was the climate change one.
So they wanted Biden to make cuts in his climate change legislation.
That's the Republicans.
Now, it makes sense from the Republican perspective
because they want that money to be spent on Americans or whatever it may be.
But the Democrats are so passionate about the climate change issue.
That would be something that they wouldn't want to concede on as well.
So that's just, I'm just giving that as an example.
There's obviously other issues cuts in.
They want reform.
They want a pandemic.
They want to receive the pandemic.
The money that was spent on that was not used on the pandemic,
pandemic to be used again.
They want spending costs.
They want work requirements for entitlements.
So there are other ones.
But the reason I'm highlighting that one specifically is because
That's such an ideological difference.
Like who would actually bend the knee or count out
to the position of the other person?
Honestly, I don't think that there's that much support or...
committed support behind the climate change agenda and spending among the progressives as the media, at least in this country, makes us think.
I don't believe, you know, when people pull the most important issues to American voters the last six years, you know, climate change isn't anywhere near the top.
So I would think that that would be an easy one to give back with and from Biden on the left and still maintain some sort of support from the progressive side on other issues.
On the on Trump side, on the conservative side, I think the most important issue.
And I haven't looked at the individual cuts.
What I've.
what I've understood is that the proposal takes us back to the level of 2022 budget expenditures.
But I did note that Congressman Luna from Florida, who's part of the negotiating team,
said that the number one goal to defund is the new 86,000 armed IRS agents,
and the new rules that the Biden administration propagated
that transactions at as small as $600 needed to be reported.
So I think this is an effort to claw at the middle class.
I don't think there's a lot of support for it.
So I think the Republicans can get that.
What they have to give up in return, I don't know.
And I don't see them kicking the can down the road.
I think this is mostly political.
I still think that we're going to have the default,
and God knows where that leads us.
Yeah, that doesn't sound like a great position. So, sure, Michael, when you first began on these spaces, you were pretty convinced that there would not be a default. I have now heard 30 different arguments that there's going to be a default. What do you think now, has your mind changed here?
I mean, it hasn't necessarily, I don't think the speaker has a lot of room to maneuver on this particular.
It takes one vote.
It takes one vote for him.
Exactly.
I mean, we have Congressman Gates in listening.
He could probably articulate the internals as well as I can.
I have folks on the hill.
I'm going to be hosting an event for the speaker actually in a couple weeks.
I think he has done the best he can on this.
I think the president is going to have to get Democrats.
on the same accord to negotiate with Republicans. Now, Doc mentioned returning to fiscal 2022 levels.
I don't think Democrats are going to agree to that because that requires spending to popular programs that many progressives like.
Now, when you look at the entitlement issue, Democrats have said, oh, my God, we can't cut entitlement programs, but from an electoral perspective,
About 70 plus percent of independent swing voters agree that there should be work requirements for entitlements.
Close to 50 percent of Democrats agree that there should be work requirements for entitlements.
So I think when you start to parse through these issues and look at the polling on this,
I do believe there is room for the president to say, okay, I can negotiate on a couple of these issues to ultimately get to a consensus here, which is why I still believe that we may ultimately be able to pass this thing.
That was fascinating. Peter, wanted to go to you. I know you've been waiting for a while. Any comments on everything that Doc and Shermichael said? And I want to be very clear.
I am very hopeful that there is no default.
I think that would be awful, not just for all businesses out there,
but just in general for the economy and for U.S.'s dominance in the world.
But Peter, you know, how are you feeling about the current thing,
about the current situation?
And where do you think we go from here?
Peter, you're muted, bottom left.
And Peter, while you come back on Danish, look, I get the arguments,
but it doesn't make sense to me.
Like, for me,
I don't see how there's going to be a deal.
Like, it makes no sense.
Why would either party want to concede?
These are issues that are important.
The American people, we've talked about them in terms of worker rights.
And I gave an example, which I thought was a bit more contentious, but okay,
but you've got the recouping the pandemic money.
You've got the worker rights.
You've got all these issues.
They're imperative and very important.
Like, I don't see how, as everyone's explained, both sides have weak leaders,
have very weak positions in their leadership position, right?
It's going to default.
That's my thoughts.
I mean, if I just really explain.
I actually am on the side of things where I don't think it's going to default.
I know I've been playing a different role on TV right now,
but that's actually, it's very clear that it's not going to default.
And I'll walk you through why.
Number one, McCarthy doesn't need his entire caucus, right?
Like, he does not need all of the votes.
Now, if he can work with his team, hold on.
I mean, as long as the Democrats vote in line, he only needs a few votes, right?
He doesn't need to bring the entire โ he can lose the entire Freedom Caucus and still get through.
Now, unless somebody raises a flag like we were talking about and, you know, tries to remove him a speaker, which was what Doc was bringing up, which, by the way, would be insane for them to do.
They're not going to do it.
I mean, unless Matt Gates comes up here and tells us otherwise, they're not going to do it.
There's no way that they're going to do here.
And ultimately, hold on, Doc.
Let me finish.
Why did they insist on the vote then?
This is probably the most consequential votes are going to take.
Why not use it here?
They insisted on the vote because they wanted him to know.
It's like sort of like just knowing that somebody's going to be back there.
So don't go too crazy.
Don't make too many deals.
But ultimately, if a few Republicans cross party lines and vote,
you know, he can just say, hey, look, I didn't want to do this, but they went for a vote.
right and they wanted a vote and we had to put it on the floor and i put it on the floor now
bainer lost everything right because of similar decision making i i know the the precedent here doc
don't don't think i don't but but at the same time the chance the high likelihood is
is that cooler heads will prevail no one wants to be the speaker of the house when the country
defaulted that is not something anyone wants to be known for
And let's just be honest, McCarthy really cares about his legacy.
You know, forget about the sociological aspect of this.
Think about the psychological aspect of it.
Do you really think about that?
I've heard you talk crap about McCarthy.
It works the other way, though, as well, the psychological aspect of this is he's already seen as a weak leader.
He had to bend the knee in terms of to Matt Gay's.
But no one's going to remember the 79th dead ceiling raise.
No one's going to remember it.
No, no, but this is a lot more.
But they will, though, because we live in more contentious times.
And essentially, if he bends the knee, it'll demonstrate again, he's a weak leader.
He's bent the need to Democrats.
If he was going to do it anyway, why even basically?
They're going to call him a weak leader regardless.
That's the point.
No, no, but this makes him much more weaker.
Like, why?
It's literally like basically you go to a fight and then you basically pussy out and run away.
That's essentially what's happening.
Now you've gone in.
You've got to make sure you're going to do something about it.
Maybe that's what he's doing.
He's showing like, I'm going to make Biden fly back.
Like, oh, I'm going to do all of this stuff to him.
He's going to, you know, I'm going to make him feel this.
I'm going to make a big stink about it.
And in the end, there will be deals made behind closed doors just like everything else in Washington.
And everybody will forget about this in a few weeks.
you know that's the most likely i don't agree you know why because look you've got to look
matt gay has demonstrated that we're living in a different and uh bobber demonstrated that they
we're living in a different time they can make people like mccarthy listen to their demands
and so essentially now he needs to demonstrate that he's not a weak and he's just going to give up
to the democratic demands and he's actually working with the republicans he's thinking about the values of the
policy of the Republicans and he is going to try and get these demands. I think when he's gone
in, he has to now try and gain something. If he doesn't, he's going to look very weak. The
Republican Party is going to look very weak. And then the next time there's going to be a
disagreement. A win can be defined in many different ways. A win can be defined as a basic way.
The next time there's a disagreement, which is going to happen immediately, they're going to be in a
weak position.
Hey, guys.
Yeah, but McCarthy,
guys,
when you talk about the Republican Party today,
when we talk about the Republican Party today,
we have to distinguish between the old Republican Party
and the Republican Party of the new slash the Maga Party.
I mean,
there are two distinct factions here,
and I think this is where the problem lies, right?
It's not just the Republican Party anymore.
That's possible, but at the same time, I think,
But again, you know, I just want to be very clear.
Think not in weeks or months.
Think in years and decades.
That's how McCarthy has been thinking about his role, right?
And so ultimately, there's no way that he will be known.
I'm telling you right now, there's no way that a man that spent so much time on his hair
is going to be known as the guy that ended up.
leading us into a default.
There is no way that that is actually going to happen.
And so this is the reality.
But the other way is you can, if framed right,
you can use it as a positive, like look,
because the Democrats were making these moves,
they were being, they were being basically inappropriate
in the terms of unwilling to engage or disagree.
And we put our foot down and we demonstrated that the Republican values,
I matter.
The Republican positions matter on these issues.
And I'm going to stand my ground.
I think this would give him a lot more respect in the party.
It would give him a lot more respect in the long term.
Until you realize that him fighting for this,
until you realize that him fighting for this led to people not getting their social security benefits for a little bit.
led to people not getting their Medicare benefits,
that people were unable to get access to entitlements
that were snap benefits is another one.
And so ultimately, you know, there are very...
And that's the Democrats' fault because they should agree
to these very reasonable...
I mean, his argument is going to be,
which I think is fair is that the Democrats are not...
not agree into these very reasonable requirements, you know, give back the pandemic money and let's
use it for somewhere more appropriate.
Don't waste your money on climate change.
Like this is very appropriate.
I don't see how we would get the blame for America wasting money on dumbass issues when
they can be spent on the American people.
I mean, if you look at the polling, if you look at the polling, whether it's climate
and Doc mentioned this, this, I mentioned entitlement programs and the requirement for
people to work.
If you look at swing voters, you look at some conservative-leaning Democrats, and you look at the battleground states that are necessary for the incumbent president or whomever is going to be the nominee on the Republican side to defeat him, the polling rests with Republicans in their position on this particular issue.
So I don't believe McCarthy has to make any more concessions here.
I think the president is going to have to merely based on the data of where most Americans fall on this particular issue, and I think he will.
Yeah, we agree, but I mean, I don't think you've got it.
Doc, go ahead.
No, yeah, I think the other question, for me, I really am curious what this room at some point, if they could address what China's feeling about this.
Are they okay with us and effectively devaluing the dollar over this, you know, sort of a hat tip to Trump thing?
I don't think they care.
Well, I mean, they do care because they hold a ton of batteries actually.
Yeah, but they devalue their own currency and the normal is right.
They can't exactly go out shouting about it.
Yeah, but ultimately, again, just to be clear, the whole world wants this to be resolved.
If anybody here thinks that there's any country, maybe Russia, but any country or maybe even some of our other adversaries, you know, that wants us to have a default, I mean, there's nobody that wants us to have a default.
Let me point out that there's a huge amount of anger, especially on the right, but it's moving more of a centrist position here.
A ton of anger at Washington, D.C.,
at the media who is absolutely going to swing in behind Biden
and try and blame McCarthy and the Republicans if there is a default, right?
But in the most of the people, a lot of the people that are drawing paychecks
that are going to be disadvantaged, at least in terms of an entire class,
are going to be federal employees.
And a lot of people in this country are fed up with the federal government here.
So there's not going to be the sort of condemnation
from the center part, political part of this country.
And certainly it's not gonna come from the right toward McCarthy.
I think Solomon is right.
I think McCarthy becomes strengthened within the party,
which is what he needs.
That's the ground that he stuck out
when he agreed with a Freedom Caucus to the rules changes.
He's no longer a centrist within a Republican Party.
He's nominally the leader of the conservative wing of the party.
Matt Gates and Bobert and Marjorie Taylor Green line up behind him consistently now.
But Marjorie Taylor Green has been condemned for pictures of where she was
sucking up to Kevin McCarthy during the Speaker election debate.
So, no, I think, again, I think it's the left,
it's got to bend on this, but I think they want it.
I think Biden wants it as a campaign issue
because they got, the Democrats got nothing to campaign on
except this and accept pro-climate change,
which is not an important item for most people.
Here the most important parts are the border,
the taxes, and the economic devaluation of our dollar,
which is affecting all of us.
Thanks.
Craig, Doc, you don't, Doc, you think this is actually a democratic issue, not a Republican issue?
I would submit to you that I think it's really in the hands of the Republicans.
Again, there's two factions here.
The Republican Party is really split.
You've got the MAGA crowd, right?
And then you have the regular Republican Party.
And I think it's in the Republican's hands, not in the Democrat hands.
I would submit to you that's really the issue here.
You've got the same in the Democrat Party, though.
You've got like extremists in the Democrat Party and then the centrist.
So it's the same problem either side.
Yeah, no, no, like you've got, for example, O'Hare, like, for example, you've got E or C.
Republican Party.
So O'Hare, like you've got AOC and her crew basically tell him Biden to, you know, invoke the 14th Amendment and he's reluctant to do so.
So there is that kind of split, just on that small example, within the Republican Party.
Yes, but it's not as pronounced as a Republican Party.
I mean, the just, just it's more pronounced.
It's just as well publicized.
The socialist wing and the Democratic wing of the Republican Party.
of the Democratic Party are alive and well and would even be more so, more pronounced,
more divisive if Bernie Sanders has stuck to his guns and still stuck to his guns about his beliefs.
Instead, he got bought out or blackmailed by the Clinton campaign.
Craig, same question to you. What's your thought on this?
Well, I did just want to kind of bring up this idea that I think we spent obviously a lot of time viewing
the you know this episode as as some sort of panacea and that after after we get to the other side of it
you know things will be be okay but i think it's important to realize that you know the day the
debt ceiling is is ultimately extended um the the economic reality that exists beyond that is not
it is not a great one and in fact what
Craig, are you breaking up? Is that me?
Sorry. Hey, I'm sorry. Can you hear me? I apologize.
Yeah, sorry.
Part of what's gotten us to this point has been tax receipts have underwhelmed this year already because of, you know, poor capital gains in 2022.
Yeah.
And an economic slowdown that, you know, is likely to hit in the second half of this year is likely to exacerbate that tax receipt problem while we continue to run up these deficits.
I mean, six-month annualized deficits are already over a trillion dollars.
And if we have a recession, we're going to have...
you know, deficits, you know, north of two trillion dollars. And so the question, the question really is,
who is going to be buying all of this treasury paper, that treasury issues after the debt ceiling is
extended? And, you know, Yellen is already
you know, gives forecasts for that. And we are looking at, you know, third quarter estimates of her raising, you know, north of $750 billion of new debt, you know, some combination of short term maturities that are going to be T bills at 5% plus interest rates as well as long term securities, you know, tens and 30s, you know, another 200 billion of those. And then we're going to do that again.
you know, in the fourth quarter. And so the question is as interest rates continue to be elevated,
and the Fed is on hold at rates of 5% or more, we are going to continue to kind of find ourselves in
in this in this debt spiral where higher interest expense continues to exacerbate the deficit situation
which leads to more treasury supply necessary which puts us into further deficits and so i think
this idea that we have an extension and that's some sort of economic panacea we don't have to
worry about this anymore is is very mistaken i'm
particularly concerned about the reality of all that treasury supply that comes after the debt
ceiling is extended and what that actually means for the economy.
An economy where the government is continuing to borrow at 5% plus will crowd out basically
every other borrower in the economy.
I mean, we know the commercial real estate industry is lacking for capital.
The venture capital industry needs capital.
Various other industries are going to need capital.
Right.
cost of capital will continue to rise globally as the Treasury comes back in and issues,
you know, for lack of the better word, a shitload of debt in order to make up for their
inability to raise debt because they've been tied at this debt ceiling. So I just, I mean,
I know it's a little bit, you know, tangential to what we've been discussing today,
but it is important to realize, you know, as we think about the outlook for the economy
you know, exiting 2023 and into election year 2024, what is the political calculus for both
parties, you know, if we have a recession, how bad is that recession? What does the Fed do? Are they
going to be forced to cut interest rates? What is the impact on the dollar? You know, how do foreigners
kind of react to, you know, that treasury supply? And that's an economic environment that I am
particularly concerned about. And so, you know,
You know, just wanted to kind of throw that out there to the crowd, but it is an important
you know, things that we should be, we should be focused on is what is the reality after this
is extended? And is that actually a good reality? Yeah, and I appreciate that, Craig. That makes
sense. And guys, we are going to be wrapping up soon. So I'd love to hear people's final thoughts
on this issue in terms of the debt ceiling, in terms of the concerns about whether there's
going to be the impact on the market, what they, if there's going to be a deal, how, what is
that deal going to look like? I'd like to hear people's final thoughts on that before we do wrap
up. So, Jim, please, we'd love to hear your final thoughts.
Yeah, a couple of real quick things.
Japan is actually the largest country holder of U.S. debt.
It's not China's number two.
So keep that in mind.
I think that most countries around the world would love to see the U.S.
dollar not be the reserve currency.
The problem is there is no alternative.
So as much as we may mismanage our house and as much as we may cause problems,
For the moment, there is really no alternative.
Now, you can come up with all other alternatives, use the one or use something else,
but it's going to be a lot more expensive and it's going to be a lot more risky to use any other alternatives.
So is the dollar being threatened as its position?
No more so than any other thing that would threaten it right now,
mainly because there is no option.
But the other thing I'll say in concluding in the last comment,
when the Treasury issues debt,
That money goes into the Treasury's general account, which is held at the Federal Reserve.
That money is removed from the financial system.
It's in the government's account, which is not part of the financial system.
So on the other side of this, when we get a deal, like we did in December of 21, in the next
six weeks, the Treasury wound up issuing $700 billion worth of debt in six weeks.
They'll do something similar, if not a little bit larger, this time around.
That is a giant suck of money out of the financial system.
And historically, the markets have struggled somewhat when that happens.
It's the opposite of QE.
You could actually argue that what's been happening as we've been running down the numbers, the Treasury's account, you know, that they've been spending their last dollar.
They're not issuing new net, new debt to take money out of the system.
They're shoving it back in as they pay their bills as they pay their employees.
They're shoving money back into the financial system.
They're adding liquidity.
But when we get on the other side, they're going to be sucking liquidity out in a big way.
A lot of people on Wall Street, and I'm sympathetic to this view, worry more about that than actually worrying about whether or not we're going to get a deal.
Because on the other side, there's a giant suck of money out of the system, and that could create problems.
It's all part of this whole debt ceiling drama.
Even the backside of this has some issues.
Thank you guys for having me speak here today.
No, thank you for coming on.
We do appreciate your time.
Let me go to Peter.
I love to hear your final thoughts.
Peter.
Hi, thanks for having me.
Just a quick thought.
There's over $2 trillion sitting in the Fed's reverse repo account.
All the Fed needs to do is stop paying Fed funds plus five basis points on that.
Take some of that trillion out to offset the Treasury bill issuance.
Thanks for that, Peter.
Jay, go ahead.
Your final thoughts.
Sure thing.
Yeah.
You know, I do think that this situation is not going to end.
You know, the debt ceiling is eventually going to be raised.
I think it's going to be very, I don't think it's going to be as easy as people think.
I don't think we are going to have a resolution, a full resolution before June 1st.
I hope we do.
But I agree with Jim that the issue is also going to be the insane amount of issuance we are going to see immediately after the debt ceiling is raised.
And, you know, you're going to see, you know, that's going to affect credit across the curve.
It's going to affect Treasury.
It's going to affect IG credit.
And the demand for IG credit is, I agree, it is going to have the effect, the opposite effect of QE.
And, you know, it's frankly not going to be good for risk assets nor the stock market.
So this is not a one and done.
You know, I think what if you see a rally on any type of positive news, it's a fade the rally type environment.
And whether you're looking at leading indicators or margins or S&P 500 earnings or the consumer slowing down, I mean, in August, you're going to have a huge burden on the consumer.
You're going to have the consumer having to pay $400 a month on student loans.
Like, this is not the end.
This is not the one, you know, the panacea.
And also, you know, government spending is about 24% of GDP right now.
It's about 4% higher than the long-term average.
Right.
And, you know, there needs to be some rationalization when it comes to government spending.
You know, for every 1% increase you see in interest rates with the amount of debt we have, 31.4 trillion,
and half of our debt is maturing in three years.
And it's $400 billion in additional tax revenue you need.
And, you know, it's not very easy to raise taxes.
So the only other option you have is to cut or inflate.
And this problem is not going away anytime soon.
And I think that there's a dichotomy between the volatility you're seeing in bonds versus a volatility you're seeing in equities and other risk assets.
And I do think that there is a risk that you could see risk asset vol rise over the next couple months.
I appreciate that, Jay. And thank you everyone for listening.
We did cover the issue.
Well, if there isn't a deal, then obviously we do know that we'll probably have another space on it,
a much larger space talking about that.
But the general sentiment is that there is a possibility that there is going to be a deal.
Much appreciated.
We'll be back tomorrow, same time, 6 p.m. Eastern.
So, yeah, join us for that.
Yeah, just thanks a lot.
I appreciate everybody listening.
Thanks, way, man.
All right.
Thank you.
Pretty crap at ending his pace.
Aren't you slay, man?
It's like awkward.
No, I don't know.
It's such a shit ending, man.
It's not my thing, I'll be on a small talk and end top.
I almost didn't have to jump in at all until you had to mess up the ending.
We'll see you all tomorrow.
Thanks, everyone.
