The writing has been on the wall for months, so some may be tempted to gloat about Rep. Kevin McCarthy’s ill-fated tenure as Speaker of the House.
The simple fact, however, is that his ouster could cost everyone, as a dysfunctional Legislature (the stewards of the nation’s finances) could push already-high borrowing costs further into the misery of ordinary Americans situation.
Moody’s had already signaled last month that it might follow rivals such as S&P Global Ratings in withdrawing its gold-standard AAA rating on U.S. federal debt if the government shuts down. The latest Beltway drama also underscores Fitch’s stark warning to the political class in August. unable to act In line with the collective interests of the country.
McCarthy was ousted after less than nine months in office, at a critical time for the economy. Most Americans have depleted their pandemic savings, repayments on nearly $2 trillion in federal student debt have resumed, and energy prices are soaring as oil production is cut.
A potential downgrade from Moody’s is only a small part of the problem. Whether it’s a 30-year fixed-rate mortgage or a 72-month new car loan, all debt is priced against a benchmark U.S. sovereign bond, whose creditworthiness (as measured by yield) forms the basis of the risk-free rate.
If bondholders start Requires 5% loan term 10 years For a government that knows full well that it owns its own money printing press and taxing power, they will have higher expectations for U.S. commercial banks that do not own their own money printing press and taxing power.
“Investors are tired of out-of-control spending, incompetent governance and the continued push for markets to the brink of economic disaster (government shutdowns and debt ceilings),” said Jamie Cox, managing partner at Harris Financial Group. nonsense).” Tell market observation.
Banks then in turn pass on the higher costs to customers in the form of higher loan rates. Everyone from small family businesses to homeowners and car buyers will feel the pain of losing faith in the government’s ability to function.
Government borrowing costs hit 16-year high
Fixed-income markets have been reeling from the six-month-old debt-ceiling crisis, which has depleted U.S. Treasury reserves. Replenishing the coffers means injecting new paper into the system to raise new funds to run the government.
Not only has this pushed the federal debt past the $33 trillion mark, but investors already packed with government bonds want higher compensation for every dollar they lend. That’s why the benchmark Treasury yield rose to 4.8%, a 16-year high.
“The concern is that escalating federal budget deficits will result in bond supply exceeding demand, requiring higher yields to clear the market,” senior economist Ed Yardeni warned. Tuesday.
Latest forecasts from the Congressional Budget Office June The government is expected to have to spend 2.5% of GDP to pay down debt this year, a full tenth of a percentage point higher than forecast in February.
Not only does this create future liabilities for taxpayers, but in a credit crunch, investors will inevitably lend first to governments and then to ordinary people.
A weak House Speaker from the start
The worst part of McCarthy’s history as the shortest-serving Speaker of the House was its predictability.
His campaign to replace Nancy Pelosi requires 15 votes – more than any other predecessor since the Civil War. Yet instead of quitting, the Republican congressman from California made so many deals to seize the nation’s third-highest office that he has zero room for rebellion given his politics. Slim majority.
It was already clear then that his power would lie entirely in the hands of a small group of ideological Trump loyalists, such as Florida Rep. Matt Gaetz, who could vote to remove him from the House at any time.
“When we stand here in a week, I will no longer have Kevin McCarthy, he will no longer be mine,” Gaetz said. on Monday.
ironic rebel leader Makes sense This week, he took back confidence by warning that Americans would be at risk if countries worried about their national debt abandoned the dollar en masse.
By staging more drama for an American people fed up with a dysfunctional Beltway, he may actually inflict at least short-term pain on the individuals whose interests he claims to protect.
“It’s not how you start, but how you end,” McCarthy said after his election in January. In hindsight, those words inadvertently proved prescient, but now may have ended up costing everyone.
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