The fight over the federal debt ceiling is Kabuki theater. What is Kabuki theater, you ask?

The United States is once again flirting with a default crisis. The clock is ticking on a deal to raise the federal borrowing limit, or debt ceiling, and prevent a default on the national debt. After months of wrangling, Congress struck a short-term deal to temporarily avoid a first-ever default, but it sets up another showdown in a matter of weeks.

The recent legislation raised the nation’s borrowing limit by $480 billion, the amount the Treasury Department said it needed to meet the country’s cash needs until Dec. 3, setting up yet another deadline for Congress to resolve the issue.

The debt ceiling, also known as the debt limit, is the maximum amount of money the feds can borrow cumulatively by issuing debt in the form of bonds to meet its obligations.

The fight over the federal debt ceiling is Kabuki theater in the city of sound and fury. Tracing its origins to the 17th century, Kabuki is the stylized Japanese drama in which performers wear elaborate make-up and costumes. Actions aren’t literal but metaphorical, conveyed through singing, dancing, and mime.

In Washington, D.C. the Kabuki theater of America’s debt ceiling is a debate with overheated rhetoric and extravagant gestures, as politicians of both parties engage in the silly debt ceiling dance until the 11th hour, when each gives ground to save face, resolves the standoff and avoids a default just in the nick of time.

A default would be a catastrophic blow to the economic recovery from the COVID-19 pandemic. Global financial markets would be disrupted, and Americans would pay for this default for generations, as global investors would come to believe that the federal government’s finances have been politicized and they are not going to get paid what they are owed. Going forward they would demand higher interest rates on the Treasury bonds they purchase.

Congress enacted the debt ceiling in 1917 to placate anti-war lawmakers who were uncomfortable about letting the Treasury Department borrow too much money to finance World War I. Since then, the limit has been raised or modified 98 times according to the Congressional Research Service. Yawn.

It’s a mechanism that allows the U.S. Treasury to borrow money for any approved spending up to a certain limit without first getting approval from Congress. Lifting the debt limit does not initiate any new spending. Rather, it simply allows the U.S. to finance obligations already authorized by Congress, including interest on the debt and payments to Social Security, Medicare, and Medicaid.

There have been regular congressional battles over the debt ceiling. Despite partisan disagreements, Congress and the President have never allowed the country to default on its debt. During the Obama administration in 2011, when Republicans refused to raise it without significant spending cuts, a deal was finally struck to resolve the debt ceiling issue.  But coming within days of the Treasury being unable to pay out certain benefits did lead to Standard & Poor’s to strip the U.S. of its triple-A credit rating for the first time in history.

There were also government shutdowns in 2013 and 2018, when the government closed non-essential services, such as national parks, and sent federal employees on forced leave.  President Trump’s demand for $5.7 billion to build a wall on the Southern border led to a 35-day shutdown in 2018.

If the debt ceiling is not raised and the government can’t borrow to pay the bills, it would have to suspend certain pension payments, withhold military and federal workers’ pay, and delay interest payments on outstanding debt, potentially roiling financial markets and raising borrowing costs.

But not to worry, Americans have seen this movie before. The debt ceiling will be raised, and the government will not default. After all the Sturm and Drang, all will be fine after Democrats and Republicans have used it to embarrass one another and seize some electoral advantage.

Federal Reserve is betting on inflation being transitory. We’ll see.

In a highly anticipated announcement several weeks ago, Federal Reserve Chair Jerome Powell said the Fed would start reversing its pandemic stimulus programs. Removing the training wheels from the U.S. economy will likely begin as soon as November.

The Fed continues to believe that inflation, while painful, is transitory. This Panglossian scenario may turn out to be a pipe dream.

The Fed cut its short-term benchmark rate to near zero when the coronavirus hit in March 2020. The pandemic lockdown and subsequent recession led to ultra-loose monetary policies and massive asset purchases by the central bank aimed at keeping the economy from heading over a cliff.

Powell said the process of dialing back the government’s buying spree, or tapering, from buying $80 billion in Treasuries a month and $40 billion in mortgage-backed securities since June 2020 should be complete by mid-2022. He indicated that interest rates could start to rise again next year but stressed that the reduction of monthly asset purchases is not tantamount to hiking interest rates.

This move comes even though the Fed does not expect inflation, which is running at the highest rate in decades, to persist. The central bank has consistently contended that this year’s surge is transitory and inflation will soon be close to the Fed’s 2 percent target. Transitory has become a byword of pandemic-era central bank policymaking.

In August, overall consumer prices rose 5.3 percent compared to last year, a slightly slower pace than in June and July but high nonetheless. The Fed still sees core inflation, which excludes food and energy prices, running at 3.7 percent this year before falling to 2.3 percent in 2022 and 2.1 percent in each of the following two years.

The Fed is also cutting its economic growth projection for this year to 5.9 percent from a 7 percent growth forecast in June. It projects that unemployment will fall from the current 5.2 percent to 4.8 percent by year’s end.

It merits noting that a 2 percent inflation rate is still a big deal to everyday Americans. If realized, it would result in prices rising by 22 percent over a decade with no assurance that wages would match the increase.

Closely related, inflation makes life more complicated for savers and retirees living on a fixed income, since it erodes the purchasing power of every dollar, which is the equivalent of raising prices. Within living memory, the average price of a cup of coffee was 50 cents. Today it’s around $3.

The Fed appears to believe that relatively high inflation rates are a temporary phenomenon; prices are rising because of the pandemic and the production shortages that accompany it.

Put differently, the Fed anticipates that inflationary pressures such as spiking energy prices and global supply chain bottlenecks will eventually dissipate. It does acknowledge that factors that are contributing to the recent rise in inflation may last longer than originally projected.

Of course, there is no mention that massive monetary and fiscal stimulus over the past year and a half is contributing to inflation. The Fed continues to blame the supply side for inflation without recognizing that monetary policy is pushing the demand side when there is insufficient supply.

But not to worry, the Fed could be correct as it navigates the fog of uncertainty – but it could be wrong. How long is transitory? Will inflation simply go away on its own? One could conclude from the data that the economy has long been overheating and inflation may continue rising for the foreseeable future.

If that is the case, the Fed should snatch away the punch bowl right away. Realistically, it will not increase interest rates to deal with inflation until Americans are angry enough to vote for the opposition party next year. Then they will have to slam on the brakes by raising interest rates aggressively, and the country may well enter a period of stagflation reminiscent of the 1970s.