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!

Mark

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here