US Default Likely. Ramifications for Years to Come.

The United States may be unable to save itself from default.

Nor from an on-going rolling crisis.

The USA is a very different political animal to what it was 10 years ago  Far more polarised and generally aggressive. The debt level is absolutely out of control and headed for a developing nation status.

Sure, someone could save the day on the debt ceiling by giving in, unlikely, but even if they do, the overall debt crisis and the higher interest cost that will forever be paid from here on, are nothing short of crippling. Even for the US.

One side of politics wants to over-spend and keep doing so regardless of debt levels. The other side wants to quickly rein in overall spending back to pre-Covid levels. Which in the big scheme of things does make sense. However, such is the other sides extreme and entrenched views on spending huge, from Defence to Ukraine to Green energy and much beyond, all in a rush, that it is difficult to see any lasting agreement here, until the whole situation completely fractures.

Can an agreement be reached anyway to keep the government going? Even this small ask is looking highly problematic.

Neither side can be seen to give in without losing both the next Presidential and Congress elections. America is that polarised at this historic moment.

I have been the most bearish forecaster in the world in maintaining that a default is a very real risk. This is because of how I perceive the shape of the behind closed doors machinations on both sides. Which are very different to their public enthusiasm posturing.

Yes, an agreement could be reached, but not without both sides coming up with a voter window dressing solution where both can be seen to give in equally. The stakes are high. The highest. The next race for the White House depends on the makeup of any debt resolution this week.

Even should Biden and McCarthy reach an agreement, if they can, it now appears very likely the Bill will not be easily passed by Congress.

It is therefore quite likely time has already run out on a US Default on January 6th.

Market shock and ramifications will be profound and extend outward over several years. US bond prices and bonds around the world will drop. The US dollar will be strong at first on safe-haven and ever higher yields long term. The equity market can simply drop like a stone.

Again it is possible for a resolution and a last moment save, but we may already be beyond that point.

Should, to my surprise, an agreement be reached in the next 48 hours, markets will momentarily rally. Before declining yet again and perhaps more savagely as people realise the struggle is not over yet, and in any case the US economy remains in decline with extreme inflation persisting.

Playing defence, even if there is a momentary rally, is probably the best course of action here.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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