Does the date in the title of this thread mean anything to you? If not, it should! It's the date the US hits its debt ceiling:
President Obama's talked of "Armageddon". To Treasury Secretary Tim Geithner - it's "catastrophic". The Fed chairman Ben Bernanke has warned of "calamity". Or, in the words of senior Republican senator Lindsay Graham: "What is calamitous is the path we're on as a nation. We're becoming Greece."
It's a week of breath-holding brinkmanship over America's debt limit - the President's given party leaders just five days to reach an agreement to raise the country's borrowing limit - or risk default when the current $14.3 trillion ceiling runs out on 2 August.
Whilst the political posturing has been proceeding apace, most commentators have been assuming that a last minute deal will be done. Though markets have been soft of late, they are not pricing in the consequence of a failure to agree to raise this ceiling.
This is where I could use the counsel of wiser heads: what would be the consequence of Congress failing to raise the debt ceiling - both in the short-term and looking slightly further ahead? It's a fundamental assumption of most theories of investing and asset valuation that US treasuries are a "risk free asset" and other debt tends to be priced relative to the "risk free rate". What happens if treasuries turn out not to be risk free? Is there a chance that the US could actually default?
Is it time to start piling up those cans of beans, shotguns, and gold bars? I guess the odds of the worst happening are slim and a last minute deal is likely to be done, but ISTM that we ought to consider the improbable case. Even if a deal is done at the very last minute, things would probably get "hairy" in the markets, to say the least, in the final run-up to the deadline. We could easily see a panic sell-off. Time to start thinking the unthinkable...
Thanks for any useful comment!
The author may hold shares in this company, all opinions are his own and you should check any statements that appear factual and not rely on them before making an investment decision. The author is NOT a qualified analyst nor authorised to give investment advice. Whilst the author is a director of ShareSoc, all views expressed are entirely his own and not necessarily those of ShareSoc.