Monday May 22, 2023 - 15:43:26 GMT
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Will the US Default on its Debt?
A US debt default is unthinkable.
A US debt default is unimaginable
A US debt default would be economic and political suicide.
But could it happen?
When those in power are held hostage to the extreme factions of their political parties anything is possible.
This seems especially true for the Republican Party where it only takes one House member to call for a leadership vote under revised rules. This weakens the hand of Speaker McCarthy as he tried to negotiate a way out of this potential disaster.
On the other hand, President Biden is not immune to pressures from the progressive wing of his party, which limits how far he can compromise.
With all that said, it is hard to imagine those involved allowing the US to go into default. However, anything is possible when talks go down to the wire with both sides negotiating with one hand tied behind their respective backs.
So, what does logic say?
Using history as a guide, logic says the most likely outcome is a last-minute agreement. Barring that, temporarily suspending the debt ceiling as has been done several times before, otherwise known as kicking the can down the road, to give more time to sort this out.
As traders, we are always on the lookout for a surprise, which in this case would be a US debt default. As logic says, this would be the less likely outcome but it cannot be ruled out. So, n the interim just buckle up and watch the headlines coming from the negotiating meetings.
Note, there is also the possibility of President Biden invoking the 14th amendment but this would be seen as a sign of desperation that could create a constitutional crisis so let’s hope it does not come to this point.
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