Making sense of the markets this week: May 28, 2023 – MoneySense

One would think a group of reasonable individuals elected to run the country would quickly agree that it’s best not to run the vessel of their economy into a self-made iceberg. Unfortunately, that’s not how the Republican Party works. Apparently, it’s perfectly acceptable to run an economy into that self-made iceberg, if you think it makes a democratic president look bad.

It bears repeating (as it often gets lost in the noise) that lifting the debt ceiling has been presented as a debate between budget priorities—but it is not. It’s a vote that essentially says, “OK, Secretary Yellen. You can borrow money to pay the bills.” Pretty much no other country in the world thinks it’s a good idea to debate whether it should pay for the commitments it has already made.

Now, you might be thinking: “That sounds like a raw deal for pensioners, veterans and the millions of Americans sent monthly government cheques. It’s also unfortunate for the people and companies invested in U.S. bonds and treasury bills.” You might also ask: “Why should Canadians care?!”

Turns out, because the world depends on American debt as a “store of value” for individuals and businesses (bonds and treasury bills as safe bets), the U.S. government refusing to pay its bills will likely shake the faith that lending money to any government or business should be considered “low risk.” 

This could lead to higher interest rates (for investments and borrowing), a fundamental reassessment of investment risk, a loss of trust in the United States on the world stage, and basically complete economic chaos. Estimates suggest that the American stock markets (which make up over half of the money invested in the world’s stock markets) would fall 45%, if the debt ceiling was reached and there was no deal in place to make sure U.S. debt payments were made.

So, should you care?  

If the U.S. debt defaults, millions of people will lose their jobs, the value of your portfolio might be cut in half, and it’s quite likely the world’s economy would completely seize up in an event akin to the Great Depression.

The good news is that the debt ceiling has been raised multiple, multiple times, and a majority of those times happened with a Republican president. The most recent reports out of Washington suggest that reaching a deal is more and more likely. Thankfully, America has never failed to repay its debts. As we were going to press Friday morning, markets were broadly up early Friday, after Reuters reported that President Joe Biden and Speaker Kevin McCarthy appeared to be near to a two-year deal to raise the ceiling and cap most spending. 

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