Observing the political farce in Washington, DC, as Democrats and Republicans try to come to terms over the debt ceiling, I’m reminded of the famous quote of New York Mets manager Casey Stengel: “Can’t anyone here play this game?”

Actually, when it comes to the lawmakers on Capitol Hill, the obscure dance-drama rituals of Japanese Kabuki theater are a more apt metaphor than baseball. At least baseball has clear rules and impartial umpires. Debt ceiling deadlines, shutdown threats…the political dysfunction in the nation’s capital is not only wearying voters but also investors.

President Joe Biden and U.S. House Speaker Kevin McCarthy (R-CA) met in the Oval Office on Tuesday, to discuss the debt ceiling impasse. Not surprisingly, there was plenty of posturing and gum-flapping, but no resolution.

Without an agreement, the federal government is expected to default on its debt as soon as June 1. As I explain below, the consequences would be dire.

Political theater along the Potomac…

What the heck is the debt limit anyway? The debt limit (or “ceiling”) was established in 1917 to facilitate financing for World War I. Before that, Congress had to authorize each bond issue. The limit allows the U.S. Treasury to issue bonds without specific Congressional approval.

The debt ceiling is an arcane and outmoded law that should be repealed. But until that day comes, we’re stuck with it.

Contrary to some of the dishonest rhetoric you may be hearing, raising the debt limit is not tantamount to giving Uncle Sam a “credit card” to allow future profligacy.

The debt limit is not a limit on spending; it’s a limit on the borrowing authority of the federal government. It represents the total amount of money the Treasury is allowed to borrow to meet the obligations of the federal budget under existing law. The limit simply authorizes the government to honor obligations as authorized by Congress.

Because these obligations currently surpass the projected amount of taxes and other revenue, they must be met in part through borrowing. That’s been standard procedure for more than a century.

The House leadership is attempting to use the limit as leverage to cut programs that already were approved by Congress. The White House refuses to budge.

If investors lose faith that the U.S. Treasury will meet its obligations, it could trigger a global financial crisis. U.S. debt is a major pillar of the global financial system, in large part because of its stability, so a default would clobber economies and markets around the world.

Congress has raised the debt ceiling 78 times since 1960. Republicans voted to raise the debt ceiling three times when Donald Trump was president, with no fuss and no preconditions.

According to Moody’s, a U.S. government default this time around would cause the stock market to plunge by one-third and wipe out $15 trillion in household wealth. A default also would push interest rates even higher.

Read This Story: Bull vs. Bear: Who Will Win the Market Tug-of-War?

U.S. Treasury Secretary Janet Yellen warned on Monday of an “economic catastrophe” if Congress fails to raise its debt ceiling in the coming weeks.

When brinkmanship occurs in Congress, a face-saving resolution is usually reached. However, in recent years, we’ve witnessed the emergence of political radicals who would be perfectly happy to wreck the economy just to make a point.

So how should you trade right now? Hunker down; stick to your long-term plan. Don’t panic over the headlines and make impulsive decisions. Wait for the crisis to pass. Leaders in the Senate on both sides of the aisle vowed Wednesday that the government would not default on its debt. Maybe the adults in the room will put an end to the play-acting, and come up with a last-minute solution.

Inflation continues to cool…

In the meantime, we just got better-than-expected news on inflation. The U.S. Labor Department reported Wednesday that the consumer price index (CPI) increased 0.4% for the month, in line with the consensus estimate. The annual increase came to 4.9%, below the 5% estimate.

Excluding volatile food and energy categories, core CPI rose 0.4% monthly and 5.5% from a year ago, both in line with expectations.

Increases in shelter, gasoline and used vehicles pushed the CPI higher, and were offset by declines in prices for fuel oil, new vehicles and food at home (see chart).

Investors were cheered by the inflation data, especially in the interest rate sensitive tech sector. The main U.S. stock market indices on Wednesday closed mostly higher as follows:

• DJIA: -0.09%
• S&P 500: +0.45%
• NASDAQ: +1.04%
• Russell 2000: +0.56%

The CBOE Volatility Index (VIX) fell 4.69% to close at 16.88. Major cryptocurrencies climbed higher, with Bitcoin (BTC) rising nearly 1.00%.

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John Persinos is the editorial director of Investing Daily.

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