Tony Crescenzi, PIMCO market strategist and portfolio manager, and NPR Business Desk Correspondent David Gura join Yahoo Finance Live to discuss the ongoing debt ceiling negotiations between President Biden and Congressional leaders as the two sides look to avoid a default.
DIANE KING HALL: Let's get right into this debt ceiling deal. It doesn't seem any closer. House Speaker Kevin McCarthy said, the parties had yet to reach a deal avoiding an unprecedented debt default. Key Republican negotiator Garret Graves added to the downbeat tone, saying, both sides were at a standoff.
Joining us now, Tony Crescenzi, PIMCO market strategist and portfolio manager and David Garret, NPR correspondent on the business desk. Let's get right into this, Tony, with the latest. Good morning. We've been here before. What about this time is different to you?
TONY CRESENZI: Not much.
And I say, as an older person working in the 1980s-- since the 1980s, we've seen this a lot of times. As you may understand, it's been 78 times that the debt ceiling had to be increased. It's just a lot of drama. I wrote a book about this thing a decade ago, not to try to sell books.
But the idea of debt-- the reaching the limits of debt use is called the Keynesian end point. Remember, John Maynard Keynes, a famous economist in the Great Depression said, if you have a problem, spend money. And that's what politicians, you could say, have been doing for decades.
But we're reaching the limits to an extent, given that we have high inflation from all the spending. Think of the UK, the United Kingdom, in the fall. Prime Minister Truss ousted when she tried to increase indebtedness. So perhaps we're reaching the limits of debt use, some practical limits. We'll always have more debt, but there's a practical limit if it has bad effects. And I think that's what markets are thinking about, to some extent. And you'll see a pushback by markets, more importantly in the future, about the increase in indebtedness, not simply politicians.
JULIE HYMAN: I want to get to David in a minute, but I need to follow up on this point. How do we know when we're getting to that point? Because as you say, the US has piled on debt and, debt and debt, and debt, and it hasn't paid really any price for that for a long time.
TONY CRESENZI: People always say, though, when will it hit the fan, so to speak? It isn't an event necessarily. It's a process, although in the UK, it was an event. A decade ago in Greece, it was an event. There was a Keynesian endpoint. It could no longer borrow from the financial markets.
You could imagine in a scenario where the debt ceiling is increased in the next week, which we expect at PIMCO. That if politicians, in the next couple of years, decide to raise indebtedness, increase spending again and borrowing, the bond market would react pretty negatively with much higher interest rates. And so I think we're there, but you won't know it until the bond vigilantes, as they call, come out. And I think that's what you'd see.
DIANE KING HALL: David, let's get you into this conversation about the debt ceiling. We've been here before. You've covered this before as well. What stands out to you this time about this debt ceiling debate?
DAVID GARRET: A couple of things. I think, first, is timing, which you mentioned at the top, that this calendar is getting increasingly tight. And I think that lawmakers and the White House are both aware of the fact that this is going to get increasingly difficult as these days tick by and we get closer to that "X date," as defined by the Treasury Secretary.
But the other thing just has to do with the speaker's majority. I go back to the last time we went through this in a big way, when John Boehner was the speaker. And he had this mass of Tea Party Republicans behind him. I think 60 of them in total who really preached austerity. He was riding that wave and was able to make demands as a result of that. He didn't fear that he was going to lose his power as a result of making these demands.
I can only imagine that the negotiations, especially between House Speaker Kevin McCarthy and the president, are quite strange in a way. Because I think the House Speaker has to be aware of how narrow his majority is every day that he's in the job. And it certainly must disadvantage him in some ways as he's making these deals or trying to broker these deals because he has to think of what the repercussions might be.
And I think a lot of strategists I've spoken with have said they very well may agree to a deal in principle, but it's still going to be largely an unknown, at least in part, if he's going to be able to get the support of his caucus to back whatever deal they come up with.
- I mean, it's so interesting, the two of you, because we're having this discussion about the nitty-gritty, sausage making, et cetera, of today. And then there's the bigger idea that Tony is talking about. David, I have to admit, I heard you in your other gig this morning on NPR, talking about this very issue.
And as you pointed out, one of the things that has prevented more severe fallout from these 78 times and yet once again today in the bond market is the so-called TINA acronym. There is no alternative. There aren't a lot of other good places for bond investors to put their money. So I would ask you, first of all, what you're hearing on that? And then I want to get Tony's take on it as well.
DAVID GARRET: A few people brought this up to me. I was talking to folks in the context of what happens to ratings. And the piece that I did this morning centered on that. Of course, S&P Global did make that downgrade back in 2011. I'd love to hear what Tony has to say about the reaction to that.
As I recall, I think it was actually quite good for treasuries to the surprise of many, as a result of that. But I think that illustrates the point that you're making, Julie, which is, if there's a downgrade or a default, we're in this strange circumstance where you have something that's been seen historically for such a long time as a really safe asset, a really safe investment. And that's thrown out of whack.
And getting back to what Tony said a moment ago, I'm really still surprised that we haven't seen more of a market reaction yet to all of this. I'm curious when that comes. And going back to the calendar, yes, we're eight days out from that X date. But there is still largely a complacency markets here, which I think illustrates what we've been talking about, that we're inured to this for better or worse. We've been here more than 70 times, as Tony said.
This is like a recurring thing in the way that Washington does business for better or worse. And I was actually talking to Tony's colleague, Libby Cantrill, who made the point that as far back as when House Speaker Kevin McCarthy was just a Congressman trying to secure that job, you saw interest in Wall Street and gaming out, what was going to happen with the debt ceiling.
And she made a point, and I think it's a good one, that it kick started Wall Street, thinking about this earlier on. So I think that it very well may be less of a surprise to investors this time around than it was in the past just because they've had to think about the realities of this for longer than they have in the past.
JULIE HYMAN: Tony.
TONY CRESENZI: Yeah, David, we would agree. I mean, the market reaction has been small. The equity market hasn't faulted much. It looks like typical volatility. Even in the T-bill market, where you could purchase T-bills that mature around the so-called X date, they are performing reasonably well. And you're compensated for the expected delay in payments, if there is one. And so it looks like markets are taking it in stride, as they probably should, by our assessment because we think that the deal will get done before the end of the week end or certainly before the X date.
DIANE KING HALL: And you brought up an earlier point, Tony, about spending and how it was the idea to paraphrase, "throw money at a problem." And that's been one of the sticking points for House Speaker Kevin McCarthy, who wants to cut spending.
And one of the sticking points in there has been the work requirements piece. And to your point, we've been here before with regard to that because one of the work requirements piece would affect TANF and SNAP. That's what some call the entitlement programs. They take a lot of money. And one of the things he wanted to do was if they're able-bodied people without dependents to focus on cutting there.
Now, Biden differs in that. So this time, there is like-- to your point, yes, we've been here before in terms of the debt ceiling. They always find a way to get it done. But it doesn't seem to be a middle ground on this issue. And also very different than what you saw back in the '90s with the Work Opportunity Act, which got loosely called the Welfare Reform Act. So what would you say-- I mean, if they didn't reach a deal, what happens?
TONY CRESENZI: We don't want to go there, I would say. And as you said, we don't want to see how the sausage is made. But you mentioned this work requirement issue. And there are other spending issues that people talk about. But one big one, of course, is you referenced it. Is mandatory spending. It's the vast majority of spending, and it's the third rail of politics.
So I was thinking about that down in the subway before I arrived here at 770 Broadway. And it's an area that politicians are loath to go. We know that the older cohort of the population votes at double the rate of the youngest cohort, which is odd because the future is determined by who we put in office.
But the older cohort is very large. It's populated by baby boomers, for example, people born between 1946 and '64. They're still in charge. You can call it a gerontocracy. The idea that older people are in charge of policy. Now, there's that issue, the mandatory spending, that won't be changed until the last boomer turns 65 in 2029 at least.
The final quick word is interest payments on the debt. We're going to have a read my lips moment. Now, I'm referring to George H W Walker Bush, 1990, said, "Read my lips. No new taxes." But he went back on that pledge because the interest on the debt reached an all time high of 3.2% of GDP. It's currently 1.7%, 1.8%.
It's going to reach that 3.2% in about five years. It's going to cause politicians to have to start to think about the debt in the way that Bill Clinton did, and solve the problem, and reached a budget surplus. So we've got a lot of issues ahead in the years ahead because we've got a lot of problems ahead in terms of new spending on mandatory spending and interest.
JULIE HYMAN: Well, and the other funny thing about this whole situation is our Rick Newman, who covers politics for us, Dave. He pointed out yesterday that the last time we had a more of a debt ceiling fight, there were spending cuts that then the next administration just came in and reversed. So all of this fighting is for nothing unless it tackles some of the more fundamental issues that Tony is talking about?
All of this stuff is like just-- I mean, for lack of a better word, piddling stuff on the margin that is probably not going to be lasting anyway because another Congress or another administration will come in and just switch it around anyway.
DAVID GARRET: Yeah, they can roll it back. And I think we've already seen that broadly with what the White House has said. I mean, they came into this saying that they weren't going to negotiate. And lo and behold, they are negotiating. They're trying to craft some deal as a result of this.
But I think Tony's getting to something really important, and that is there are these really big issues that Congress and the White House policymakers largely have to have to sort out. And I think what's difficult is that we've forced all of that into this crucible. And he talks about a Keynesian event. We have this event now that's definitely man-made, definitely as a result of the way that our government is structured.
But so much stuff is crammed into it. And I think the reason that is is that Washington seems unable to have the bigger and important conversations that Tony is outlining. Yes, we have to talk about the trajectory of debt, and deficits, and entitlements. But we have all seen the polarization and the lack of progress that takes place in Washington today.
It just seems to be the case that you have to have this forcing mechanism. You have to have some fire burning beneath lawmakers and policymakers to get anything done. I think we can all agree that that's a shame. People are sent to Washington to tackle these issues and to debate these issues, and to make progress. That has been a rare and rare thing here in recent years.
JULIE HYMAN: One of the things, perhaps we're not polarized on I guess is that--