Founder of ‘The Warning’ newsletter Steve Schmidt joins Yahoo Finance Live to discuss the U.S. debt ceiling debacle, the fight against inflation, and the expectations for President Biden’s meeting with House Speaker Kevin McCarthy.

Video Transcript

- Well, this story will no doubt dominate US media this evening. Joining us to help untangle it all is Steve Schmidt, political strategist and founder of "The Warning" newsletter, YouTube channel, and podcast. He's known for having worked on various high profile campaigns, including those of George W. Bush, the late Senator John McCain, and former governor of California, Arnold Schwarzenegger. Thank you for joining us this morning.

So as we were saying, we've been here before in 2011. This does have a different bit of a feel to it in terms of perhaps the credibility of letting it get right to the brink and perhaps maybe over the brink. What are your takeaways at this point?

STEVE SCHMIDT: Well, you should think about this like walking out onto thin ice seven days a week every year of winter. One day eventually, you'll fall through the ice. And so fundamentally, this White House meeting what we're seeing is Mitch McConnell is taking the position of this is between Kevin McCarthy and President Biden. We all saw what happened during Kevin McCarthy's leadership votes.

We should expect the same type of chaos inside the caucus, the Republican MAGA caucus. But essentially what McCarthy is doing is holding a gun to the head of the American economy by refusing to pay for the spending that he, Kevin McCarthy, and the Republicans, particularly during the Trump era, ran up. And so from the beginning of the American Republic, one of the safest bets in all of the world has been that the United States pays its debts.

Should the United States default, this will have a cataclysmic effect for the American economy, the global economy, and America's political standing in the world. But what this is at the core is a political crisis manufactured fully and wholly by America's politicians who are threatening the prosperity of the American citizens who they work for. And it is a real threat.

- Right. So given how much is at stake, though, what are we expecting in terms of outcomes from this initial meeting? Because neither side wants to back down.

STEVE SCHMIDT: Well, there are two legitimate sides to this. And I think that's important to understand, which is foundational to the White House position, which is the raising of the debt limit speaks to the spending that has already happened. Now, the size of the American debt is something to be worried about. The size of government spending is an important debate to have.

But that's not what this debate is about. This debate is about paying the bill on the spending already done. And that's the thing. There are no-- there are no small government parties in the United States anymore. Both parties are profligate, and both parties are spending at a level that will take the country to the edge fiscally of oblivion at some point.

But regardless of that long-term debate, this issue is about maintaining the full faith and credit of the United States, and the threats to obliterate it are an act of political vandalism, not a policy difference. And so the hijacker isn't in a real estate dispute with you. They're hijacking. They're taking something.

And so we have a hijacking situation with the American and global economy. We've seen this play out now as kabuki for many years. But in this instance, this moment, and this train track has been clear as day since Kevin McCarthy became Speaker in January. We're headed to a very dangerous moment where there's very little evidence that these people are able to resolve big complicated tangles that they have made for themselves.

- So then as we try and look for what could be the tipping point here, I mean, as we look at Wall Street at the moment, it's more focused on the inflation fight than anything else. But as we get closer and closer to this date, could be June 1st, according to Janet Yellen, could be perhaps several weeks after some analysts put it in July. Without really seeing any sort of market reaction to this, can we expect any sort of other tipping points between now and then?

STEVE SCHMIDT: There's only one consideration. I think that one of the Wall Street reactions is Wall Street tries to look for some rationality in all of this, tries to make a prediction. There is no rationality in this. And that's what's broken about American politics. It's become detached from rationality.

So as this moves forward and moves closer to the line, the only consideration that will truly matter from a negotiating position on Kevin McCarthy, is there a backlash in the country from the American people among key constituencies that he assesses is necessary for the purposes of maintaining his majority? If he believes that he can advance forward without harm being done to that, then the chances of a default happening increase exponentially.

- I mean, when you have that sort of laser focus not just on Kevin McCarthy because McCarthy's position, President Biden coming in with a 36% approval rating according to the Washington Post ABC poll, there's a lot to lose here. And there's also going to be a lot of blame to go around if this doesn't get put through.

But who do you think is actually in a worse position here? If you're looking from Main Street versus Wall Street and looking at this, where does the blame actually end up lying?

STEVE SCHMIDT: There is no American who is in worse position with regard to this than your middle income working family. That's who pays the price. That's who gets hurt. The average American, the 40% of the country that doesn't have $400 cash available. This will do significant damage to America's standing in the world, to the status of the dollar as the World's Reserve currency. It has enormous geopolitical implications.

And every American leader from the beginning of the country through the generations has understood the absolute necessity of this country paying its debts. Now, part of the brokenness is the stupidity of the error, the inability to have a serious conversation, a complex conversation about anything. And again, government spending, the $30 trillion American debt, these are all legitimate and necessary issues. And it is good that they should be debated.

But you don't debate these issues by refusing to pay the bills on the money that was already recklessly spent that has the effect of beggaring future generations of Americans. So the magnitude of this as an economic crisis is significant. But in the end, the consequences of this will be politically disastrous and further undermine the faith of the American people in democracy as they see the brokenness that has resulted from these two political parties that are unable to put the interests of the country and the American people ahead of whatever posture they're in and whatever fight of the moment that has nothing to do with the long-term peace, prosperity, and the pursuit of happiness of the American people.

- Which is all it should be coming down to in the grand scheme of things. That's why we elect our leaders. A big thank you there to Steve Schmidt, political strategist and founder of "The Warning" newsletter, YouTube channel, and podcast. Thank you for joining us on Yahoo Finance.