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Sorry, Tea Party: Why the Debt Ceiling Increase Is Already a Done Deal

With lawmakers having only narrowly averted a government shutdown, many media outlets predict an even bloodier brawl over whether to raise the federal debt ceiling. I doubt it, and for one simple reason: Everyone knows Congress and the White House have no choice but to increase the government's ability to borrow.

Republican leaders may have been willing to turn out the lights in Washington for a few days, but their threats to maintain the current debt limit unless President Obama agrees to massive spending cuts carry much less force. That's because failing to raise the ceiling could result in the U.S. defaulting on its debt.

That, in turn, would be disastrous for the U.S. economy, and particularly for Wall Street, investors and big corporations holding billions in government debt. No one knows that better JPMorgan Chase (JPM) CEO Jamie Dimon, who has been squawking loudly about the risks of failing to increase the nation's $14.2 trillion debt limit. As the banker recently told attendees at a U.S. Chamber of Commerce event:

"Companies like us, every single company with Treasuries, every insurance fund, every requirement, it will start snowballing," Dimon said. "All short-term financing would disappear."
Saving the golden goose
In other words, House Speaker John Boehner can't hold President Obama's feet to the fire over the debt ceiling without also burning a key Republican constituency -- the business community. With corporate profits reaching record highs, enormous pressure will be brought to bear on Republicans not to tip over the gravy train. And whatever the Tea Party's influence on the Republican caucus, it's no match for corporate clout.

Even lawmakers who campaigned on promises to freeze the limit know that the vast majority of Americans are are more concerned about jobs than about spiraling federal debt. Triggering economic calamity over the debt ceiling would be no less politically self-destructive for tea-swilling Republicans than it would be to pols who supported raising the limit. And on Capitol Hill, self-interest has a way of trumping even the staunchest political ideals.

Meanwhile, if the eleventh-hour deal to cut short-term federal spending shows anything, it's that the Democrats themselves aren't wedded to principle when it comes to defending popular entitlement programs. The White House is already signaling its willingness to cut Medicare and Medicaid. And with the President set to introduce his own budget on Wednesday, the contours for a compromise are already taking shape:

[A] group of U.S. senators -- three Republicans and three Democrats known as the "Gang of Six" -- have intensified closed-door discussions about a package of cuts and revenue increases that would cut $4 trillion from the federal budget deficit over 10 years. They have been in constant contact with Erskine Bowles, a Democrat who was co-chairman of the White House's deficit-reduction panel last year. Their plan would essentially reduce the deficit by setting caps and targets that Congress would have to meet on things like taxes and spending.
Markets yawn
One party that doesn't appear at all spooked about the prospect of a U.S. default -- he financial markets. Bond yields remain low, and the cost of credit insurance on U.S. Treasuries has fallen in recent months. Of course, investors could have their heads buried firmly in sand. But my guess is that they've already sussed out the politics of the debt fight and concluded that the ceiling will be raise.

Naturally, much blood will flow before the government reaches the debt limit on May 16. Lawmakers will strike a pose, as Republicans did in threatening to shutter the government over Planned Parenthood. But a deal will get done.

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