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One might think that a group of sane individuals charged with running the country would quickly agree that it’s best not to plunge their economy’s ship into a homemade iceberg. Unfortunately, the Republican Party doesn’t work that way. Apparently, plunging an economy into this self-made iceberg if you think it will make a Democratic president look bad is perfectly acceptable.
It needs to be reiterated (since it is often lost in the noise) that the debt ceiling hike has been presented as a debate between fiscal priorities – but that is not the case. It’s a vote that essentially says, ‘Okay Minister Yellen. They can borrow money to pay the bills.” Hardly any other country in the world thinks it makes sense to discuss whether it should pay for commitments already made.
Now you might be thinking: “That sounds like a tough deal for retirees, veterans, and the millions of Americans who send government checks monthly. It’s also unfortunate for the people and companies that invest in US bonds and Treasury bills.” You might also ask: “Why should Canadians care?!”
It turns out that the US government’s refusal to pay its bills is likely to shake the belief that you’re lending money to a government because the world relies on American debt as a “store of value” for individuals and companies (bonds and… Treasury bills as safe investments). or the deal should be classified as “low risk”.
This could lead to higher interest rates (on both investments and loans), a fundamental reassessment of investment risk, a loss of confidence in the US on the world stage, and basically complete economic chaos. It is estimated that if the debt ceiling were hit and there was no deal ensuring the US debt was paid off, US stock markets (which account for more than half of the money invested in global stock markets) would plummet by 45% become.
So, should you care?
If the US debt defaults, millions of people will lose their jobs, the value of your portfolio could be halved, and there is a strong possibility that the global economy would collapse completely in an event like the Great Depression.
The good news is that the debt ceiling has been raised multiple times, and most of those times have happened under a Republican president. Recent reports from Washington indicate that an agreement is becoming increasingly likely. Thankfully, America has never failed to pay off its debts. As we went to press on Friday morning, markets were broadly higher early Friday after Reuters reported that President Joe Biden and Speaker Kevin McCarthy appeared close to a two-year deal raising the ceiling and cap on most spending.
