Is there a little black swan swimming there?
There we are again
In a stern letter to Congress, U.S. Treasury Secretary Janet Yellen stated that the bottom of the treasury is looming in sight around mid-October. If the Democrats and the Republicans do not reach an agreement in the short term on raising the debt ceiling, the United States is in danger of heading for a partial government shutdown. The Congressional Budget Office estimates that the United States can hold out a little longer before the debt ceiling becomes an issue. The debt ceiling? That was a thing of the past, wasn’t it? That was taken out of the way in the Trump era, right?
Debt ceiling back again
Unfortunately. Two years ago, under his presidency, it was indeed decided by agreement of both parties to suspend the debt ceiling. The legal limit on the amount of debt the government is allowed to hold was put out of action. Until last month. Since early August, the U.S. government is no longer allowed to borrow unlimited amounts of money to finance itself. The new cap is at $28500 billion. That’s the debt at the time the law was suspended in 2019 (22000 billion) added to the 6500 billion in new borrowing.
The wrong time
Just when the United States is in the process of extricating itself from the effects of the pandemic, this is not very convenient for the Biden administration. After all, there is already major disagreement over proposed spending on infrastructure, social policy, tax reform, and climate change. The Build Back Better program cannot count on a large majority in Congress. In addition to the Republicans, several Democrats are also quite skeptical about the size of the proposed government spending.
Ten years ago
Let’s go back ten years. The stock markets were hit hard then because the normally routine raising of the debt ceiling became part of the battle between the Republicans and the Democrats. Then-President Obama failed to reach an agreement, and Credit Rating Agency Standard & Poor’s decided to downgrade the credit rating of U.S. government bonds. The stock market lost no less than 20 percent. The year 2011 went down in history as one of the lesser stock market years. Is a repeat possible?
A black swan?
Interest rates are historically low, the economy is widely stimulated by governments, and companies are reporting phenomenal profits. Not surprisingly, stock markets are setting one All-Time High after another. The wait seems to be on for a passing Black Swan, an unexpected event that turns the stock markets upside down. Could the sudden return of the debt ceiling play the role of the black swan? Just when Biden seems to be having great difficulty getting his ambitious plans for infrastructure through, this is not a good time, to say the least. Just when the stock markets seem to be worried about rising inflation, that could limit the Federal Reserve’s room to manoeuver. Is the end of this rally insight?
Is a downward revaluation imminent?
Some nuance is in order. The United States is the only country that works with an absolute debt ceiling. Many countries, for example, work with a debt percentage of GNP. After all, debts move with the growth of GNP. An absolute ceiling provokes constant adjustments. Consequently, since World War II, the debt ceiling in the United States has been raised about a hundred times. Raising it was invariably a routine act of Congress. Until it became part of the partisan war between the two parties in the United States. The Republicans have since indicated that they do not intend to cooperate this time. Rating agencies have already warned. A possible downgrading of the national debt could cause unrest. Investors can hold their breath in the coming weeks. If they have the time to do so in this rally.