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Shutdown Odds Soar As McCarthy Rejects Senate Plan

The 2024 Republican presidential candidates will be holding their second debate tonight — well, most of them anyway. But there's also ongoing drama on Capitol Hill, where the odds of a shutdown keep climbing. Here's what's happening.

McCarthy Rejects Senate Plan, All but Guaranteeing a Shutdown

Let's cut right to the chase: Congress is still on a seemingly inexorable march toward a government shutdown in less than four days.

Yes, the Senate has a bipartisan plan to keep federal agencies running, but hardline House Republicans say it would be dead on arrival and House Speaker Kevin McCarthy reportedly told his members Wednesday that he would not even hold a floor vote on a stopgap bill sent over from the upper chamber.

McCarthy later indicated that he would back a short-term spending bill if it included additional border policy changes.

McCarthy's members were finally able to advance four of their own annual appropriations bills Tuesday night, but those bills would be doomed to fail in the Senate and the speaker's plan to try to win some good will for a short-term spending patch still faces serious hurdles since several hard-right Republicans insist they won't support any stopgap.

In short, a shutdown seems inevitable at this point. Goldman Sachs Economist Alec Phillips told clients in a note Tuesday night that the odds of a shutdown this year had climbed to 90% in his estimation, and nothing happening in Congress right now offers hope that will change.

If you want to spare yourself the headache that might also be inevitable from tracking the ins and outs of Capitol Hill machinations, feel free to skip ahead now. Otherwise, here's some more detail about how Congress is or isn't dealing with the shutdown threat.

The Senate: The Senate moved ahead on its stopgap plan Tuesday night with a bipartisan 77-19 vote. On Wednesday, Senate Majority Leader Chuck Schumer urged McCarthy to also set aside partisanship.

"Every bill House Republicans have pushed has been partisan, every CR has been aimed at the hard right, and every path they've pursued to date will inevitably lead to a shutdown," Schumer said in a speech from the Senate floor. "Speaker McCarthy: The only way – the only way – out of a shutdown is bipartisanship. And by constantly adhering to what the hard right wants, you're aiming for a shutdown. They want it, you know it, you can stop it. Work in a bipartisan way, like we are in the Senate, and we can avoid harm to tens of millions of Americans."

The Senate bill rolled out this week includes about $6 billion each for Ukraine aid and disaster relief but does not include border funding, meaning it would face stiff opposition from House Republicans.

Highlighting the divisions in the GOP, Senate Minority Leader Mitch McConnell followed Schumer in urging lawmakers to avoid a shutdown, which he said would be harmful and unnecessary. "The choice facing Congress is pretty straightforward. We can take the standard approach and fund the government for six weeks at the current rate of operations," he said. "Or we can shut the government down in exchange for zero meaningful progress on policy."

The White House has also endorsed the Senate approach. "The Senate's bipartisan continuing resolution will keep the government open, make a down payment on disaster relief, and is an important show of support for Ukraine," Press Secretary Karine Jean-Pierre said in a statement. "House Republicans should join the Senate in doing their job, stop playing political games with peoples' lives, and abide by the bipartisan deal two-thirds of them voted for in May."

The House: McCarthy's latest playbook involves trying to deflect blame and pin it on President Joe Biden and the Senate. At the same time, the speaker is reportedly expected to bring up a package Friday that combines a short-term funding patch with spending cuts and Republican border policies. But he still doesn't have the votes to pass it. Politico notes that multiple Republicans "left a closed-door conference meeting Wednesday morning still vowing to oppose any stopgap funding measures that would prevent a shutdown" and that at least eight hardliners would vote against McCarthy's continuing resolution.

The bottom line: The House and Senate aren't on the same page, and Republicans remain divided, with some in the party continuing to embrace the idea of governing by crisis — or not governing at all.

"The different tactics nearly guarantee a government shutdown, unless lawmakers can force some other long-shot solution," The Washington Post reports. "The two chambers working in opposition to one another probably won't have enough time to pass a stopgap spending bill."

Rising Income Inequality Hurts Social Security, Expert Says

Social Security faces a crisis in 2034, when its main trust fund is projected to become insolvent, potentially resulting in significant cuts in benefits. Simple demographics play a major role in the problem, as the massive baby boomer generation continues to retire and fewer young workers pay into the system. But according to one expert, rising income inequality also plays an important role in the funding crunch.

Stephen Goss, the chief actuary of the Social Security Administration, told attendees at a conference earlier this month that "unanticipated economic setbacks," including the Great Recession along with the rise of income inequality starting in the 1980s, explain some 80% of the program's shortfall. Due to these two factors, the adjustments applied to Social Security by a committee led by economist Alan Greenspan in 1983 — including raising the retirement age and making benefits taxable — have failed to maintain solvency in the program for as long as originally projected.

Between 1983 and 2000, incomes for the top 6% of earners rose by 62%, Goss said, while the incomes of the bottom 94% rose by just 17%. That means that most income growth occurred among high earners, who don't pay Social Security taxes above a certain level. (In 1983, the top income subject to the payroll tax, referred to as the Social Security Wage Base, was $35,700 for individuals; in 2000, it was $76,200; it's set at $160,200 in 2023.)

As a result, the share of total income subject to payroll taxes fell from roughly 90% in the early 1980s to 82% in 2000.

"This is a massive change in the distribution of earnings, and that's what caused us to have a much smaller share of all covered earnings falling below our taxable maximum," Goss said, per MarketWatch. "This is a major component of the shortfall we've had."

Number of the Day: 46%

With the number of Covid-19 cases rising around the country as we head into the fall, about half of Americans say they plan to get the latest version of the vaccine that targets new variants of the virus.

In a new poll by KFF, a nonprofit group formerly known as the Kaiser Family Foundation, 23% of respondents said they "definitely" plan to get the booster, while another 23% said they will "probably" get it. On the flip side, 19% said they will "probably not" get it and 33% said they will "definitely not."

The vaccine continues to be a political marker and divider. While 69% of Democrats said they will definitely or probably seek out the shot, just 25% of Republicans said the same — and the majority of Republicans (53%) said they will definitely not get it.

Fiscal News Roundup

Views and Analysis

Prices Are About To Soar Even Higher — And It Could Trigger A Recession

America has been living in an economic version of the greased-pig game — and if we lose our grip on inflation, things could get ugly.Liam Eisenberg for Insider

Trying to catch a greased pig is an American tradition that has fallen out of fashion — so you're forgiven if you don't know the rules.

The game, once a staple of county and state fairs, is simple enough: A small pig is covered in lubricant and thrown into a ring where contestants try to catch the animal. What makes it hard — and fun to watch for spectators — is that pigs are shiftier than lumbering humans. Just when you think you have a grip on them, the slick porker can slip through your fingers. And when it's all over, both pig and human end up dirty.

Since the pandemic, America has been living in an economic version of the greased-pig game — prices have been running free despite assurances from policymakers and economists that the pig (inflation) will be caught soon, which is to say, brought down to the Federal Reserve's 2% target.

For the past few months, it seemed like we may have finally caught the pig. The consumer price index, the most-watched measure of inflation, was moving downward smoothly. At the same time that prices were cooling off, the rest of the economy seemed to be holding up. The labor market was healthy. Until August, the stock market had been staging a glorious rally. And consumers were so intent on spending money to have a good time that cities let Beyoncé dictate public transit.

But just as greased pigs are unpredictable, so is inflation. August's CPI release showed that inflation increased 3.7% from the same time last year, higher than July's print of 3.2% and a tick above analysts' expectations of 3.6%. This increase was mostly due to rising energy prices, but even core inflation, which strips out volatile categories like energy and food, showed signs of heating back up. Core CPI registered 4.3% year-over-year — much improved from its peak of 6.6% in September 2022 — but it increased 0.3% on a month-to-month basis, higher than the Wall Street consensus. This pig doesn't run in a straight line.

In this greased-pig economy, stability depends on how confident investors and policymakers are that they're close to catching the pig. A lack of certainty opens up a whole host of questions about the future. Such as what happens — and how ugly will things get — if the pig manages to slip out of our arms? What will the economy look like if the chase gets prolonged? How dirty will we have to get to actually catch it?

If we lose our grip on inflation, it means interest rates will surely have to stay higher for longer — tightening financial conditions for consumers, governments, and businesses. Consumers will eventually stop spending and lower corporate profits will hurt the stock market. It means a sagging economy, or even a recession, is still on the table. It means there is still room for central banks to make an error, slip, and fall in the mud while the pig keeps running.

Moving in a mess

In the messy economy the pandemic left us, it's not easy to pinpoint exactly why inflation has been so stubborn. On an Economy 101 level, inflation occurs when demand for goods or services outstrips the ability to supply or produce those goods and services — the pandemic threw both sides of that equation out of whack. Supply was limited by factory shutdowns, supply-chain snarls, and business closures. At the same time, demand was higher thanks to stimulus checks, boosted savings, and revenge spending. The mismatch in what people wanted versus what the economy was able to produce pushed up prices for everything from cars and washing machines to airfare and a drink at a bar. And despite assurances from Federal Reserve Chairman Jerome Powell and others that this was a short-term rebalancing, in reality, it was the start of a now three-year-long chase.

The Fed has done everything it can to try and get the inflation pig back in the pen, and in recent months, it appeared like it was closing in on its goal. CPI inflation peaked at 9% in June 2022 and has been going down steadily since. Many economists predicted that the Fed would have to crush the demand side of the equation in order to wrangle inflation — and crushing demand eventually would mean hurting the labor market as companies size down from a lack of business. But Mike Konczal, an economist at the left-leaning Roosevelt Institute, argued in a recent paper that the main driver of the recent disinflation has been the normalization of the supply side. As Konczal pointed out, we've seen a decline in prices despite a strong labor market and consumer demand. So the decline, he argued, must be coming from the supply side — businesses are finally being able to get people the products they need without a problem.

Of course, the pig chase isn't over. Normalizing things on the supply side has been a slow process, but in many respects that was the easy part — businesses want to get their production going again. But with inflation still above the Fed's goal, it's clear we need to recalibrate some on the demand side still. That means we may be entering the messiest, most slippery phase yet.

Beyond the higher-than-desired headline and core CPI numbers, there are also other signs that prices may be reaccelerating. Take the so-called "supercore" CPI, which strips out housing costs in addition to energy and food prices to get a sense of the underlying inflation rate for common service businesses. The measure, which has attracted increased attention from the Fed, accelerated to 0.37% on a month-over-month basis — the highest reading since March. And the Producer Price Index, which tries to track what companies are paying for the stuff they need to run their businesses, jumped by 0.7% in August, the hottest reading since June 2022 and well above the 0.4% increase expected by economists.

The chief reason to doubt our grip on prices is the American consumer. But given Americans' proclivity to spend, it will be tougher — and more painful — to catch this pig on the demand side. The Federal Reserve has so far tried to put a damper on demand by hiking interest rates from 0% to over 5%, making money more expensive. Consumers have been strong enough to bear these increased borrowing costs and, on one hand, that's been good news. But on the other, their desire to spend every last dollar on Taylor Swift tickets is making this pig harder to catch. The latest CPI report showed that prices for food away from home (a proxy for eating out at restaurants) increased 6.5% from the year before, while transportation services (think cabs, Ubers, etc.) were up 10.3%. If we know anything about this pig, it's that it likes to party.

If the pig slips away and inflation does start meaningfully rising again, the Fed will be forced to resume its interest-rate hikes. The longer rates stay high, the longer financial conditions are tighter or tightening, the more strain we'll see on the consumer and on businesses. This is the scenario some economists worried about: that by hiking rates too high and sucking money away from consumers and businesses, the Fed could tip us into recession. That's when we'd see layoffs and stock-market malaise.

It's clear that the Fed and other central banks are keeping a close eye on this possibility. Chicago Fed president Charles Evans said that if it meant finally wrestling inflation down, he'd rather overshoot interest-rate hikes and have a mild slowdown than slip into stagflation. Similarly, the European Central Bank raised rates last week, despite recession fears on the continent. "Inflation has declined, and we want it to continue to decline and to reinforce that process," ECB president Christine Lagarde explained at a presser following the decision. "And we are doing that not because we want to force a recession, but because we want price stability to be there for people who are taking the brunt of inflation."

Pocket reality

There is a chance that this all works itself out on its own. Earlier this month, JP Morgan CEO Jamie Dimon said that the consumer will eventually run out of steam, exhausting accumulated pandemic savings by Christmas. If the Roosevelt Institute's Konczal is correct, that will have to happen for inflation to go down. In the best-case scenario, this gradual slowdown will be enough to catch the pig for real: The supply side will be healed, while consumer demand cools off just enough to keep things level — a soft landing. However, the longer the Fed's hiking cycle persists — the longer the chase goes on — the more likely the landing will be hard.

After a summer of hope, the potential for this chase to end badly is clearly weighing on investors' minds — and the more worried investors get, the more skittish they are. Uncertain investors tend to start asking more questions, such as: Just how accurately are the Fed's models tracking real-life experiences? What happens if they misread what gas prices are doing to people's pockets and hike too little or too much?

"What you're going to start seeing is the investing public saying, 'Hey, you've stripped so much out of core inflation that it no longer represents how humans interact with the economy,'" Justin Simon, a portfolio manager at the hedge fund Jasper Capital, told me.

Lest you forget why we're chasing this pig in the first place, the US Census Bureau released data showing that inflation-adjusted median household income fell by $1,750 in 2022. Americans are poorer because of high inflation. Letting it run free is not an option. This isn't horseshoes or hand grenades, it's pig wrestling — close is not good enough.

Linette Lopez is a senior correspondent at Insider.

Read the original article on Business Insider

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FTX Bankruptcy Claims Soar In Value In Over-the-Counter Markets As Estate Recovers $7.3B

The expected payout to FTX creditors has more than tripled this year after a successful asset recovery.

FTX marshaling over $7 billion of assets, its valuable stake in Amazon-backed AI-startup Anthropic and the potential restart of the exchange contributed, Matrixport said.

The optimism about improving recovery pushed the bankruptcy claims market into a frenzy.

The crypto exchange FTX's bankruptcy has been characterized as one of the messiest in U.S. History. Legal fees in the bankruptcy case have already topped $200 million. Founder CEO Sam Bankman-Fried's criminal trial is scheduled to get under way next week.

But in over-the-counter markets where investors trade bankruptcy claims, the level of expected payouts for FTX creditors has more than tripled this year – reflecting success in the estate's efforts to recover billions of dollars of assets.

According to data gathered by Matrixport, a crypto services provider that is tracking the market, the expected payout for creditor claims against FTX has surged to an average of 37 cents on the dollar, its highest since the bankruptcy filing in late 2022, and up from just over 10 cents at the start of 2023.

"This development is promising news for all FTX creditors," Matrixport analysts wrote this week in a report.

When a company declares bankruptcy or files for Chapter 11 bankruptcy protection, as FTX did in November, creditors who choose not to wait until the resolution of proceedings to get money back can dispose of their credit claims to speculators focused on distressed assets. The price of these claims often serves as a proxy for the expected recovery for victims.

The expected payout, as it looks now, represents a remarkable improvement since the aftermath of FTX's bankruptcy filing. Last November, creditors offered their claims at only a few cents on the dollar and almost no one was buying them, CoinDesk reported.

How did FTX recover $7.3 billion of assets?

Matrixport attributed the improvement to the successful efforts to recover and claw back assets.

FTX reported earlier this month that under John Ray III's leadership, the veteran Wall Street bankruptcy lawyer who is shepherding the exchange through the bankruptcy process, had managed to marshal $7.3 billion of assets, including $3.4 billion in crypto, $1.1 billion in cash and $200 million worth of real estate on the Bahamas.

"The FTX recovery process appears to be largely complete, amounting to $7.3 billion, with only minor donations – such as to Stanford University – still pending," the report said.

There might be some additional clawbacks that could improve creditor payouts, Matrixport said, such as a $2.1 billion claim against once-rival crypto exchange Binance and another $700 million claim from investment firm K5, related to Michael Kives, a former aide for Bill and Hillary Clinton.

The company also holds a highly-coveted $500 million stake in artificial intelligence (AI) startup Anthropic, which the exchange used customer funds to acquire so creditors have a claim on it. FTX explored the sale of the stake, but decided to halt the process in June. This might turn out to be a savvy move, as tech giant Amazon has said it plans to invest up to $4 billion in the startup earlier. Amazon's investment "could lift the value of FTX creditor claims," Matrixport said.

Lastly, a potential restart of the exchange – often referred to as FTX 2.0 – could be promising for creditors.

"The successful recapitalization of an exchange has been achieved before, with every creditor becoming an equity owner," Matrixport said. "Understanding this dynamic could be of material significance to claims holders."

FTX claims market fires up

"The market is so hot that distressed asset investors are absolutely clambering over each other for claims."

Thomas Braziel, co-founder and managing partner of 507 Capital

Improving chances of recovery unleashed a new wave of demand for FTX creditor claims among distressed asset investors, market participants told CoinDesk.

"FTX [claims] are probably the hottest ticket in town," said Thomas Braziel, co-founder and managing partner of distressed asset investment firm 507 Capital. "The market is so hot that distressed asset investors are absolutely clambering over each other for claims."

He said that the market activity for FTX claims dwarfs that of other bankrupt crypto firms, constituting 90% or even more of the overall trade volume.

The guide price for FTX claims was recently around 35-40 cents on a dollar on Claims Market, a bankruptcy claim marketplace operated by distressed asset investor Cherokee Acquisitions.

The court update about the $7.3 billion assets recovered was a pivotal moment for claims investors, according to Brian Ferrara, director of Cherokee Acquisition's Claims Market.

"We have seen several new buyers step into the market after FTX's Sept. 11 Stakeholder Update and meetings, which has increased competition," Ferrara said in an email.

Markus Thielen, Matrixport's head of research and strategy, explained that the actual price of a claim may depend on different factors such as jurisdiction, size and "cleanness" of the holder.

"There's a big bifurcation going on in the market," 507 Capital's Braziel said, with larger claims changing hands at a much higher price than smaller ones. The "clean, small" claims under $1 million usually trade anywhere between 15 and 25 cents on the dollar. Claims over a million are priced at low 30s, while $5-$8 million tickets could sell in the 40s.

Regardless of size, claims have multiplied in price since FTX's bankruptcy filing, and it's due to John Ray III's efforts to recoup assets, according to Braziel.

"All eyes are on John Ray," he said. "[He] is going to take all these distressed asset guys to promise land."

Edited by Bradley Keoun and Marc Hochstein.

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