As McConnell Rebuffs Yellen Over Debt Limit Limbo, Democrat Infighting Risks Delaying $3.5 Trillion Package By 'Weeks Or Months'

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by Tyler Durden
Thursday, Sep 16, 2021 - 01:48 PM

On Monday we noted how Goldman sounded a red alert over the debt limit debate brewing in Congress - which has a "drop dead date" sometime between late October and early November.

As repo expert Scott Skyrm said, "for the past several years, Congress always reached a compromise before the possibility of a "technical default" creeped into the markets. This year, as we get closer to the "drop dead date" (which hasn't yet been determined) the markets will start pricing in distortions."

Well, it appears things are headed in that direction with Thursday morning news from Bloomberg that Senate Minority Leader Mitch McConnell (R-KY) told Treasury Secretary Janet Yellen to pound sand over working with Democrats to raise the federal debt ceiling.

"The leader repeated to Secretary Yellen what he has said publicly since July: This is a unified Democrat government, engaging in a partisan reckless tax and spending spree," said McConnell spokesman Doug Andres on Thursday. "They will have to raise the debt ceiling on their own and they have the tools to do it."

Adding further pressure to the situation is Democratic infighting over their $3.5 trillion economic blueprint, which Bloomberg noted on Wednesday risks delaying things "by weeks or months" as moderate and progressive Democrats argue over taxes, health care and other unresolved issues. Chief among them, the size of the package - with Democratic Sens. Joe Manchin (WV) and Kyrsten Sinema (AZ) balking at the cost. Last week Manchin called for a 'strategic pause' in negotiations amid soaring debt and rising inflation. Progressive Democrats, however - whose votes are necessary for passage, say the $3.5 trillion is the minimum amount necessary to achieve their priorities.

"It’s going to take some time," said Sen. Ben Cardin (D-MD), adding that "as you put out one area, another one crops up."

The expansive $3.5 trillion package entails much of Biden’s first-year agenda and includes a mix of tax increases on the wealthy and corporations, as well as greater spending in areas including child care, health care and climate change. 

With Republicans unified in opposition, Democrats are pushing it through the Senate using a process called reconciliation that lets them skirt a GOP filibuster. But with the slimmest of majorities in both chambers, Democrats will have to be unified in support.

The differences among Democrats manifested themselves as the House panels finished their work. The Ways and Means Committee deferred action on raising the limit on the state and local tax deductions, or SALT, and a sweeping proposal to regulate drug prices failed to win approval in the Energy and Commerce Committee. It will be up to party leaders to decide whether those provisions can be inserted later in the process and still muster the votes needed to pass the final bill. -Bloomberg

Biden met with Sinema and Manchin at the White House on Wednesday, however all parties were mum about the talks aside from Sinema's office calling them "productive" and White House spox Jen Psaki saying there would be "ongoing discussions." 

Meanwhile, the delays are putting House Speaker Nancy Pelosi in a bind - as she promised moderates a vote on a $550 billion infrastructure plan by Sept. 27. Progressive Democrats including Rep. Alexandria Ocasio-Cortez (D-NY), however, have warned that they won't support that bill unless the $3.5 trillion package is agreed to by both chambers first.

More disagreements exist over the level of taxation on the wealthy - with Sen. Finance Chairman Ron Wyden pushing for an inheritance tax, energy tax credits tied to carbon emissions, and levies on stock buybacks and partnerships. In addition, House Democrats have yet to agree amongst themselves on SALT - the ability for wealthy people to write off state and local taxes on their federal returns, which was capped during the Trump years at $10,000. House Democrats from New York, New Jersey and California are pushing to remove the cap - a handout to their wealthy constituents, while progressives are set to oppose it.

Ongoing issues also include drug price regulation - which was thrown in jeopardy on Tuesday after three Democrats on the House Energy and Commerce Committee voted against a proposal which would allow the US Govt. to demand lower drug prices while tying future price increases to inflation. According to the report, "The savings to the government derived from the plan are slated to help pay for a large portion of the economic package. Without them, the measure would be as much as $600 billion short."

In short, be on the look out for 'distortions' as we approach the drop-dead date for the debt ceiling, and the economic package potentially drags on for 'weeks or months.'