Messy or not, the Senate is nearing a relatively quick or more tortuous conclusion of the 2021 debt subject to limit drama. Cracks in the lingering uncertainty began showing up shortly after the Democrats and Republicans held their respective regular Tuesday lunches. Non-leadership Democrats insisted they will not raise it through reconciliation, and Senators Ted Cruz’s and Lindsey Graham’s clear softening of their previous stance that reconciliation was the only way to resolve the standoff lead to the simple observation that something’s changed in the Senate.
Any number of explanations are possible obviously, but we see two compelling reasons to reaffirm our call that default is very highly unlikely. First, the Senate is scheduled to recess next week for the Columbus Day break. These weeks are usually filled with fund-raisers, high-profile state events, and even a little down time. Second, no time is a good time for the US to default. A pandemic with all the economic spillover, especially to supply side inflation and pre-holiday inventory shortages, hardly commends itself as a great time to upend global markets and US voters’ livelihoods. Default never was in the cards. The chief questions have always been about the timing of enactment, the path to get there, and the political price for it. We see three main scenarios:
Scenario 1: At 2:15 p.m. today, the Senate will proceed on a motion to invoke cloture (limit debate) on S. 1301. This is the vehicle we outlined in our Tuesday morning note. We’ll find out whether a simple majority will be enough to proceed with this measure. This is the cleanest and most expedient effort under consideration and would mean they accomplish the task by week’s end.
Scenario 2: If S. 1301 fails, then we believe that over the next couple of days Senate Majority Leader Chuck Schumer will consider how to carveout an exemption for the debt limit from filibuster. This is not an easy vote for a few members of his caucus who have opposed to changing Senate rules. In fact, Senator Joe Manchin this morning reiterated his long-standing opposition to amending them. But if forced to choose between a second FY22 budget committee process to enable a simple majority increase in the ceiling, this option becomes more appealing to some holdouts. Put another way, would Democrats rather endure a 10-day death march the culmination of which is the ability for a simple majority to do business or accept GOP obstruction and modify the rules that allow a simple majority vote to further suspend the debt ceiling. The fact that 97% of our slightly more than $28 trillion debt pile happened before President Biden’s inauguration is motivational. This scenario takes us into the weekend, at least.
Scenario 3: If the filibuster exemption fails, then the Senate Democrats will have no other choice but to return to the Budget Committee to reopen the reconciliation process – one that would take at least 10 days – and takes them dangerously close to the October 18 fiscal cliff. This requires a dollar increase; suspension isn’t available via reconciliation. It was last raised to $22 trillion and now federal debt subject to limit is about $28 trillion. Democrats would have to cover the $6 trillion and add a cushion that is sufficient to last beyond the midterms. This is possible only if the wiggle room Treasury Secretary Janet Yellen highlighted last week materializes. Senator Lisa Murkowski was the most outspoken Republican yesterday opposing getting so close to the trip wire.
Democrats are strongly opposed to dealing with the debt ceiling in reconciliation as it risks saddling them with the terrible optics of raising the debt limit to pay for their stimulus package when in fact stimulus will be paid for by revenues generated from their proposed changes to the tax code.
Lastly, Senate Republicans and Democrats also routinely caucus on Thursdays. What we don’t learn in the coming eight or so hours likely will become clearer around 2:30 p.m. tomorrow afternoon. We expect a path to a debt limit adjustment gets wrapped up over the next few days.
