The Debt Ceiling Risk

We are in the midst of a government shutdown. It is inconvenient to some of us. It is unfair to others, especially to furloughed government employees on tight budgets. The fact that our executive and legislature cannot agree on budgets, policy, and process to avoid these kinds of impasses is embarrassing not only domestically, but also internationally, where the repercussions are even more serious. For all of these inconveniences, hardships, and embarrassment, it is not the shutdown that is the issue of worry here. The much greater risk is in not raising the debt ceiling in a timely manner. In the world of monies, either belonging to governments or private enterprise or even individual portfolio, waiting is a dangerous decision.

If our legislature does not raise the debt ceiling, our government’s borrowing limit, by October 17th, we run the risk of not being able to pay our bills. The US Government could go into default. The Wall Street Journal, in an October 4th article, reported: “The Treasury Department has said that no later than Oct. 17 it will only have $30 billion in cash–a sum that will be exhausted in one or two weeks, according to the Congressional Budget Office. After that point, Treasury is expected to start falling behind on its bills.”

What are the consequences of the United States of America not being able to pay its bills? First and foremost, this will create a lack of confidence in the economy. This lack of confidence and not being able to pay bills could result in the following repercussions:

  • China, our largest creditor, may well look to sell our bonds.
  • The Open Bond Markets for municipalities and corporations will be at a much greater risk to collapse and thus choking off their abilities to seek any new cash flow.
  • Pressure on bonds will cause interest rates to spike.
  • There will be major shifts in currency markets. The dollar could drop dramatically versus the other major currencies.
  • There will be serious interest rate implications that could take years to recover from.
  • The default of the government will cause many projects to be cancelled or suspended. Payment of government workers will get even worse than it is now.

The above could cause a bond and stock market crash not just in the US, but globally. The recovery has been slow and tenuous to date. Not raising the debt ceiling in a timely basis could have dire consequences.

This impasse and risk has been brewing for at least 2 years. We had a taste of this in 2011. At that time the market went down about 15% and took several months to recover. The recovery was, in part, due to the Federal Reserve pumping money into the system. There is concern that The Fed may not be able to do the same this time. Their options will be limited.

Since the Great Recession, our legislature has become more and more polarized bringing us to this current risk and state of affairs. The polarization in terms of budget and universal health care has stagnated the government. We need our legislature to step-up and work out a solution to avert this short term risk. Longer term, they need to put measures in place to not play this game of Russian Roulette every time the debt ceiling needs to be addressed.

This is not doom and gloom prediction, but a very real risk. However, We the Congress have both power, and more importantly, the responsibility to mitigate and avert these risks. Congress, let’s do the right thing… and soon.

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