Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Even with all the sturm and drang over the debt ceiling, most around Washington and Wall Street are operating under the assumption that Congress and the Biden administration will find a way to keep paying U.S. bondholders. That doesn’t mean the economy will escape unscathed, according to PGIM Fixed Income chief global economist and former Biden White House official Daleep Singh. “Major economies are getting pulled apart from within due to unprecedented levels of political polarization,” said Singh, who advised President Joe Biden on national security and economic policy. “The debt ceiling drama is symptomatic of that polarization.” The growing fascination with payment prioritization – in which Treasury would pay debt obligations while withholding checks for other government programs — ignores how credit agencies could ding the U.S. for failing to deliver on basic benefits, services and contracts. And while prioritization might let certain financiers whistle through the graveyard — Zach has more on that here, ICYMI – the outcome “would be only fractionally better than default,” Singh said. “If we don't make payments on time for other obligations, what are the credit agencies going to do? And if you have multiple credit agencies that have downgraded the U.S., does that force selling among investors that have investment mandates that restrict them to [securities with] triple-A ratings?” he said. “This is the lifeblood of global financial markets.” If credit agencies downgrade Treasury securities en masse, the cost of borrowing (and insuring against default) will go up. Any financial asset that’s priced on its spread to Treasury yields would feel the effects. Mortgages, credit cards, corporate bonds – everything gets more expensive as soon as investors start attaching more risk to the likelihood of the U.S. meeting its obligations. That’s a much bigger danger after repeated, protracted battles over the debt ceiling, Singh added. “The way in which investors across the world think about the riskiness of Treasuries is going to be different,” he said. “That's a legitimate concern that nobody can discount at this point.” Obviously, there’s some precedent for that. S&P downgraded U.S. debt from triple-A during the 2011 debt ceiling crisis; an event that shook markets and threatened the economy’s emergence from the financial crisis. Even though key areas of the economy are on better footing than mid-2011 — the unemployment rate is now a fraction of what it was at the time — fiscal policy has gotten even more complicated. The debt-to-GDP ratio has spiked in the intervening decade and foreign investors now hold trillions more in Treasury securities. What’s more, after being rattled by the Covid-19 downturn in early 2020, there are now questions about the long-term stability of a Treasury market that’s supposed to be terra firma for investors. There “really wasn't that type of concern prior to 2011, even through the GFC,” Singh said. The political climate is also more toxic. Speaker Kevin McCarthy’s(R-Calif.) tenuous grip on a narrow majority hinges on his commitment “to a fiscal path that's incompatible with where the administration is willing to go,” Singh said. IT’S TUESDAY — And Sam is still recovering from San Francisco’s dismal showing in Philadelphia this weekend. Tips will make him feel better. Send those to Sam at ssutton@politico.com and Zach Warmbrodt at zwarmbrodt@politico.com. You can also find us on Twitter @samjsutton and @zachary
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