US Debt Default May Actually Happen

The headlines of the House passing their Debt Ceiling bill at first sounds like good news. Until, you realise it is precisely what the Senate and the President will totally refuse to accept.

They have already loudly declared this. It is already a dead bill.

Debt defaults are nothing new. Even European nations have had them. For the US though, well, it was previously unthinkable.

I say previously, because believe it or not, the US could actually default this time. Bringing Federal business to a standstill and fracturing global debt and financial markets. Perhaps irreparably.

Until now, the general wisdom and indeed my own view, has been that as per usual both sides, Democrats and Republicans, would push their agendas to breaking point and then relent.

All of a sudden though, things are different. The political climate on the Hill is changing dramatically.

Some, perhaps many Republicans are now seeing debt default as something the US would survive. It might even be a way out, but at the very least would probably destroy the President’s chance of re-election. The upcoming Presidential race, likely between Biden and Trump, has somehow become confusingly entangled with the debt ceiling issue.

If the debt ceiling is not raised, then the USA goes into default. Necessitating at the minimum a revision of the credit worthiness of all US debt, and more likely generating a global financial markets disturbance akin to a planet killing meteor strike.

This is truly a global issue for the US dollar remains for the moment the world’s reserve currency. Sovereign and other loans around the world between nations and global institutions are denominated in US dollars. The greenback is supposedly the back-stop for the global financial system. If the credit worthiness of US debt is reduced, then so too is the value of the US dollar in the splitting of a second.

No one knows what the full ramifications would be. Either immediately or over the long term. Most certainly this would be a clear and obvious sign-post of the end of the US empire in terms of its modern historic dominance.

However, not everyone on the Hill sees it that way. There are growing backroom rumblings that it just might be time to draw a line in the sand to finally stop this utterly out of control juggernaut of more spending and more borrowings. That this on-going process inevitably leads to the destruction of the US economy anyway, and would it not be better to have a somewhat decided and controlled deflation of the super-huge debt balloon that has been created.

The idea that things cannot go on as they have is growing.

US Government Debt to GDP

Furthermore, it is true that the Biden Administration has continued to spend like there is no tomorrow. Refusing to wind down spending after the extreme escalation in response to Covid and to instead simply build on this level of spending as if it is somehow a new normal. One thing is for sure, it is a new normal the US economy and people simply cannot afford.

There is clear social decay occurring in the USA at the moment. From the hollowing out of previously vibrant cities to the new number one cause of death in the USA, beyond heart attacks and cancer, now being drug overdose. In the 18-45 year age group.

That might sound like a brutal statistic to offer up in an economic piece, but it points to serious underlying problems in the economy. Citizens are resorting to heavy drugs as an attempt to deal with what is to them insurmountable stress and anxiety.

This particular crisis is indeed born out of economic dysfunction and alienation. The wealth gap is growing like never before and large swathes of America are being left behind. Often not just in terms of socio-economic disparity but simply by geography.

Yes, you are right, there have always been such problems in all societies, but for the USA this is something very new. We are talking about an indicator of economic and social well-being that has become so widespread and extreme that it has replaced heart attacks and cancer as the primary cause of death.

Not a pleasant subject, but when you consider this is happening at one end of society, and at the other on the Hill the US is approaching true debt default risk, it does give pause for thought. Economically, as well as morally these are extreme times.

The Republicans are right to say never-ending spending cannot go on forever, but is pressing a historic debt default the only solution? Perhaps it is.

The key point here however, is that unlike previous debt ceiling crises, this one could actually turn into a full blown debt default crisis. The probability of US debt default is now at about 20%, I would suggest, and edging up to 25% very soon.

This, unfortunately, is not something investors can ignore. It Is becoming sadly more of a ‘cross your fingers’ and hope situation. Than one of assuredness of an eventual happy outcome.

There is no doubt both sides are digging in. This is always the case, but very strong statements are now being made on both sides.

Is it possible, that the US could push into default, then somehow come out of default all without too much financial market upheaval? Though probably not.

The problem is, some on the Hill are beginning to think so?

Stay tuned, as the debt crisis is about to get a lot more precarious, before/if it gets better.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.