Could the U.S. Default? An Impossible Thought Rattles the Market

Forget the government shutdown, the real doomsday for investors is October 17th, the default deadline

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U.S. stocks rounded out a six-day slide on Friday as tempers flared in Washington D.C. After this weekend’s spectacular showdown between the House and the Senate, rival parties, and rivals within parties, analysts predict an even bigger jolt to the markets when trading floors open on Monday.

But it’s not October 1st, the much ballyhooed date of the government shutdown, that has investors spooked — it’s October 17th, the day the government runs out of money to pay back its loans and risks default.

The specter of a deadbeat Uncle Sam is fanciful, for sure, but no longer inconceivable in light of the recent display in partisan brinksmanship. A growing chorus of market-watchers told the New York Times that they can no longer take the risk of default completely off the table. One analyst has even put the risk at 40 percent. The other 60 percent he chalked up to “blind faith” in the government. Whether Congress can restore that faith will depend on its ability to work a miracle and agree on a budget before October 17th.

(MORE: 11th-Hour Brinkmanship Before Government Shutdown)

8 comments
JohnDavidDeatherage
JohnDavidDeatherage

It's nothing more than political brinksmanship today.  But what about 10 or 25 years from today?  The national debt continues to grow by leaps and bounds. The Fed keeps interest rates artificially low but what happens when interest rates return to normal levels?  It will take the majority of tax revenue collected just to pay interest on the debt.  Our creditors will demand higher rates on our bonds to compensate for the higher risk.  We'll be reducing or eliminating social programs and military programs to cut costs.  History will not look kindly on our generation. We have squandered the future because we couldn't say no to anything today.

tom.litton
tom.litton

@JohnDavidDeatherage The only reason interest rates will rise is if the economy recovers, which causes inflation to rise.  The economic recovery will cause increase revenue and the increase inflation erodes debt. 

The debt is expected to remain stable for the next 10 or so years, then rise gradually.  But that rise is because of entitlements.  Nothing being talked about by either party currently addresses those issues.

TheInsomniac
TheInsomniac

@JohnDavidDeatherage The deficit is shrinking. Once you factor in the cost of one-time stimulus programs, and the cost of two failed wars, our trajectory is toward moving back into the black. Yes, for the time being the debt continues to grow, and it will, until we fully recover from the disasters of the '00s. It's not accurate to say that the "debt continues to grow by leaps and bounds" without providing that context.

JohnDavidDeatherage
JohnDavidDeatherage

@tom.litton @JohnDavidDeatherage The economy doesn't have to improve for interest rates to rise. The Fed simply has to stop artificially holding down interest rates through Quantitative Easing.  Your point that inflation erodes debt is true but that's a little like saying cancer cures death.  Inflation above 2-3 percent is a tax on everyone and everything. 

tom.litton
tom.litton

@JohnDavidDeatherage @tom.litton What i meant is that the fed wouldn't raise interest rates until the economy recovers, and inflation starts to be a problem.  Their target inflation rate is 2% (although some say it should be higher).  It is still enough to erode debt, especially since the deficit is shrinking so fast.  

Your comment about inflation being a tax is interesting for 2 reasons.  First, ideally wages would keep up with inflation.  The fact that it isn't happening is a real problem that nobody is addressing. 

Second, many people have debt which will also get eroded by inflation, which isn't a terrible thing, especially if wages were to keep up with inflation.