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Expect a last-minute compromise on the debt ceiling

May 26


Americans can’t say they weren’t warned. According to Treasury Secretary Janet Yellen, if Congress and the White House fail to reach an agreement to lift the limit on federal debt, the Treasury could start to miss payments on its obligations as early as June 1. A U.S. default would shatter the $24 trillion market for Treasury debt, causing financial markets to plummet across the globe. So how will this all end? Straight Arrow News contributor Peter Zeihan thinks it’s too early to panic because he’s betting on a last-minute compromise.

Excerpted from Peter’s May 23 “Zeihan on Geopolitics” newsletter:

We’re talking U.S. politics today, and for those who don’t eat, sleep, and breathe politics (aka having a life), it’s about the debt ceiling. Spoiler alert: It will probably end the same way it always does…

Anytime the White House and at least one house of Congress are in different hands, that house of Congress will use it as a chance to squeeze in some concessions. This is all just political theater, but it has gone a bit further than usual.

It can be attributed to the state of flux many of the leading political factions have found themselves in. Between the unions, fiscals, and business conservatives all transitioning, there’s no one around to knock some sense into these other groups more willing to push the limits.

So how will all of this end? I would expect a last-minute compromise because no one in the government wants to actually face a default.

Hey everybody, Peter Zion coming to you from windy Fort Lauderdale. Sorry about the background noise. It’s unavoidable on this one. But that’s okay. Because I’m talking about US politics today, specifically the debt ceiling issues. For those of you who don’t obsess about the ins and outs of what’s going on in Washington, I understand if you don’t understand what’s going on, that’s totally fine. The very short version is since the United States runs a significant budget deficit that requires approval from Congress to raise the funds that are necessary to run the government. And so every couple of years, whenever the White House and Congress are in different hands, whoever’s in Congress tries to use this issue as leverage to get political concessions in one way or the other, rarely happens at all, when the same party controls both houses. But since we’re in divided government, right now, the Republicans are trying to wring some concessions out of the Biden administration. Now, if the United States were to not increase the debt ceiling, that would mean that the United States would no longer be able to raise capital in order to fund government activities. And that would hit everything, whether it’s social security, or Medicare, or Medicaid, or the military or the food stamp programs, basically, the government would have to triage and decide what not to spend money on, and actually live within his means. Now, there is no one that I know who has two brain cells to rub together in Washington who thinks that a default on US debt, or a collapse of the US government functioning would be a good idea. So usually, this is just used for political theater. And in order to generate a pretext for getting some concessions, and both parties have played that name. The reason that this has gotten a lot closer to the wire with us now within a month of the United States actually defaulting or entering into Brett budgetary crunch is because our political system has shifted significantly. Now, for those of you who’ve been following me for a while, you know that I’m of the belief that we’re going through a political transition, that we go through every once in every generation or two. And when that happens, the factions that make up the parties move around, or they jump ship, and maybe they become swing voters, maybe they switch sides. And while that’s going on, everything is remarkably fluid and very angry and social media certainly hasn’t held. The stage that we’re at at the moment is that Donald Trump’s succeeded in exercising the fiscal in the business communities from the Republican coalition. But he’s also succeeded in bringing the unions into the Republican Party from the Democratic coalition. And Joe Biden now that he’s president has admitted he’s partially successful at breaking up the unions and the Republicans and trying to get the unions back. And what this means is that the unions, the fiscals, and the consumer, and business conservatives are all in flux, and all are basically swing voters. Now, those are the three factions that know how to do math, for which economics is the core part of why they’re involved in politics. And so when you’ve got the three factions that know the most about things like math and finances and budgeting no longer part of the political core, everyone else who’s willing to use the debt ceiling as a political wedge can go a lot farther, because there’s no longer a group of sane people in the background, say, No, we’re not going to do that we’re gonna try something else. We’re seeing something similar with the greens. Because we don’t have unions, fiscals, or business voters represented in Washington, and really any level, the greens are able to impress their view of economics and a lot of policies. And so we’re getting a few things that maybe hit don’t hold up to normal fiscal rules. I still don’t think we’re going to be facing a default, I think I still think we’re going to have a last minute compromise. Joe Biden has canceled part of his Asia trip in order to come back and hammer out a last minute deal. But this is probably going to go down to the wire. And that’s simply because our political system is too much in flux. So hopefully that brings a little bit of context, a little bit of detail into what has become an unnecessarily problematic development. And I hope hope hope cooler heads will prevail in the long run. All right. That’s it for me, you guys. Take care

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