with connor lokar

LET'S TALK ABOUT THE DEBT CEILING

There is an ongoing battle between Congress and the White House over the debt ceiling. Join ITR Economics Senior Forecaster Connor Lokar as he takes a deep dive into the debate in the latest episode of TrendsTalk!

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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello everyone. Connor Lokar, senior forecaster here with ITR Economics, checking in for another TrendsTalk. And today we are talking about the debt ceiling. Is it a looming disaster or more of a dilemma? Because it’s the ongoing debt ceiling battle, it’s all the rage in the headlines these days and felt like this would be a good opportunity to discuss whether it is, again, that disaster scenario or maybe a little bit more hype than substance. So realistically, this is a game of chicken between the Biden administration and the Republican controlled House that has already offered their bill that would suspend the debt ceiling in exchange for some spending cuts by almost 14% over the next decade. Now, it is worth noting that we have played this unproductive game of chicken 78 times since 1960. That’s right, 78 times since 1930. 78 times our benevolent leaders in Washington DC have come to terms typically agreeing to continue spending more money than we bring in.

We don’t generally see, or not just generally, we never have seen an outright default scenario. So I guess our stance at this point at ITR is pretty simple. It’s that we do not view default as the probable outcome of the current situation because that would be the exception and not the rule. So we’re not going to build default into our macroeconomic thinking at this point because history shows that as noisy as things get, one side typically blinks and we generally avoid disaster. So we’ll certainly concede that the closer we get, even if default is ultimately avoided, it can certainly create some painful noise, particularly for financial markets. The most recent relevant example here is 2011 under President Obama when the negotiating deadlock pretty much went right up to the buzzer and did trigger some significant volatility in financial markets at the time. So when we look at this generally, it seems like Wall Street cares more about these debt ceiling battles than Main Street typically does.

So the closer that we get, it’s probable that we may see some upside pressure on interest rates and borrowing costs, the cost of ensuring government debts, and perhaps some downside equity risk that our portfolios might not appreciate. All of which, if we did get a little bit of that noise, would still be in support of our overall view that macroeconomic activity continues to grow, but at a slowing rate as we move through the second half of the year. The longer it lasts, the more downside risk that there is. So that’s really where we’re at right now. I often get the question on the road after my keynotes as well, what is the forecast if we do default? Which is challenging to answer because we don’t have a backup US economic forecast hidden behind glass that says, “Break glass in case of default.”

The same way that we don’t have a forecast in case of a Chinese invasion of Taiwan or the Russian use of nuclear weapons or any other litany of black swan events. If those things happen, we’ll certainly react, but the debt default is a bridge that we do not think that we’re going to cross. If we do, you can expect plenty of signaling from ITR on what that means for our forecast for this year and beyond. But for now, we’re still on this side of the river. So thanks for stopping by. We’ll see you on the next one.