Discover more from Letters from an American
May 3, 2023
“No one should assume that the Fed can really protect the economy and the financial system and our reputation globally from the damage that [a U.S. default] might inflict,” Federal Reserve Chair Jerome Powell said today. “We shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills. It just shouldn’t be a thing,” he added.
Powell commented on the debt ceiling crisis when he was in front of the press to announce an interest rate hike of a quarter of a percentage point intended to reduce inflation further. Interest rate hikes make it more expensive to borrow money, which should cool the economy. At the same time, more expensive borrowing upsets the stock market, which tends to fall after a rate hike, as it did today.
Interestingly, while Republicans are blaming Democrats for creating inflation by pumping too much money into the economy through social welfare programs, The Wall Street Journal yesterday embraced the argument that a key factor in inflation has been price gouging by corporations. A piece by Paul Hannon noted that businesses are boosting their profit margins, confident that consumers will blame supply chain issues and higher energy prices rather than the companies padding their profits.
Oil giant Shell just announced almost $9.6 billion in profits in the first three months of 2023.
But Powell’s management of inflation is a smaller story right now than the debt ceiling. Today, the White House Council of Economic Advisers explained three different scenarios. If the debt ceiling crisis runs right up to the edge of default and is resolved before that default, unemployment would rise by 0.1% and 200,000 jobs would be at risk. A default lasting less than a week would cost 500,000 jobs, creating a 0.3% rise in unemployment. And if the U.S. goes into a longer default, the Council of Economic Advisers says, 8.3 million people will lose their jobs and the stock market will fall by 45%.
In every case, economic growth will turn negative.
The White House yesterday released a fact sheet outlining the cuts Republicans are demanding before they will agree to raise the debt ceiling. In addition to costing jobs and throwing the nation into a recession, their demands will cut nearly 7,500 rail inspection days, shut down at least 375 air traffic control towers, and cut $5.2 billion from highway infrastructure projects. The cuts will eliminate nearly 200,000 child care slots, cut 1.7 million people from food security programs, and remove rental assistance from nearly 600,000 families.
In short, the Republicans’ demands are a way to force the country to accept their vision of the country, one that relies on the markets and private enterprise and slashes government action to provide a basic social safety net, promote infrastructure, regulate business, and protect civil rights.
So far, Senate minority leader Mitch McConnell (R-KY) has stayed out of the fight over raising the debt ceiling, both because he was out of the Senate recovering from a fall, and because he has apparently wanted to let House speaker Kevin McCarthy (R-CA) deal with the far-right extremists in the conference while appearing to give establishment Republicans plausible deniability from the extremists’ demands. But Biden is trying to pull McConnell into the negotiations to emphasize that the fight over the debt ceiling is not about him and McCarthy, but a struggle that involves the whole government.
While McConnell seems to be trying to hold Senate Republicans apart from the House extremists, a story that has fallen under the radar is that Senator Steve Daines (R-MT), chair of the National Republican Senatorial Committee, the man responsible for the fundraising to get Republicans elected to the U.S. Senate, has endorsed Donald Trump. Daines is in close touch both with Trump and with the wealthiest Republican donors. Senator John Cornyn (R-TX) made it clear to Jonathan Swan and Carl Hulse of The New York Times that all the Republicans care about is winning back the majority. “I really don't care what the tactics are,“ he said.
Not caring about tactics so long as you are in power might well be a problem for another Republican, former Georgia Senate candidate Herschel Walker. Senior political reporter for The Daily Beast Roger Sollenberger dropped a story tonight alleging that Walker solicited hundreds of thousands of dollars from a billionaire industrialist who believed he was donating to Walker’s Senate campaign, only to have Walker take the money personally. If this story pans out, it suggests Walker will be in legal trouble for election finance issues.