Drama on Debt Ceiling Crisis; China May Need More Stimulus
Author: Greg Valliere
July 15, 2019
A SENSE OF CRISIS is increasing over the U.S. debt ceiling, which may have to be raised before Congress leaves for an absurdly long vacation — the House departs on July 26, the Senate a week later; neither will return until Sept. 9. The Treasury Department may run out of money in early September, according to Secretary Steven Mnuchin, who wants the debt ceiling raised in the next couple of weeks, before the recess.
AN ODD COUPLE: Mnuchin has been talking regularly with Nancy Pelosi; the two had an unusual phone conversation this past Saturday evening. (Like most Democrats and some Republicans, Pelosi has no use for acting chief of staff Mick Mulvaney, a deficit hard-liner, so she prefers to deal with Mnuchin). The problem is that her demands may be far too rich for the White House.
SINCE THE DEBT CEILING VOTE is absolutely, positively mandatory, there’s a huge temptation to load it up with must-pass amendments. Pelosi wants to break existing spending caps; she would agree to a massive hike in defense spending, which most Republicans want, with an equal amount of fresh money for domestic programs (the ratio usually favors more increases for defense than domestic spending).
IN ADDITION, PELOSI WANTS TO TWIST THE KNIFE into Trump by demanding $9 billion in extra funding in the 2020 budget to allow veterans to see private doctors, a direct assault on the president’s signature issue of caring for veterans.
TALKS WILL CONTINUE THIS WEEK, but we don’t expect a quick breakthrough. Trump’s crude rhetoric this weekend, urging some progressives to “go back where they came from” has ignited a firestorm on Capitol Hill — ironically bridging the gap between Pelosi and her restive young leftists. No one, including Pelosi, wants to do Trump any favors, but a handful of key members of both parties realize that they’re playing with fire if they don’t raise the debt ceiling.
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MORE STIMULUS IS LIKELY FOR CHINA in the wake of this morning’s second quarter GDP report, which showed the lowest rate of growth in 27 years. The rise of 6.2% could have been worse (it was roughly what markets expected, down from 6.4% in the first quarter), but it reinforced concerns that China’s growth is slowing. And at the margin it increases prospects for a trade deal with the U.S. later this year (although revived talks seem to be off to a slow start).
THE GDP REPORT ALMOST CERTAINLY WILL INCREASE PROSPECTS of more stimulus from Beijing — further cuts in Chinese banks’ reserve requirement ratios, perhaps more tax cuts, and more funding for bond issuance by local governments, which theoretically should boost infrastructure spending. There’s already been major stimulus for the latter two sectors, which has kept Chinese industrial production and retail sales solid.
OBVIOUSLY, THE TARIFF WARS are the major obstacle to better economic growth and confidence in China and the U.S., but further stimulus has its limits — even in the U.S., where prospects for a 50 basis point rate cut from the Fed fell sharply late last week, as inflation showed some signs of life. Aggressive stimulus in this country still seems likely from fiscal policy, as Pelosi and Mnuchin focus on not whether to hike spending — but by how much.
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