This black swan event will be avoided if politicians can agree on a plan… Oh oh.
So is this black swan finally going to flap its wings and knock over markets?
That’s the thing about black swans. They almost never happen. But when they do, they’re huge.
And that’s what we’ve got with another debacle brewing over the US debt ceiling.
If you’ve been in markets as long as I have, the whole debt ceiling thing is a bit of a yawn.
Almost every year the US government bumps up against the ceiling, there’s a period of political theatre that follows, and then the ceiling gets lifted, and everything goes back to normal.
But I’m telling myself to not be too complacent this year. Because if the debt ceiling story blew up, it would have a biblical effect on markets.
(Biblical like massive floods destroying the world, not biblical like thou shalt not wear cloth of mixed fabrics).
But let’s pull back a second and get our bearings, just in case this isn’t your first debt-ceiling rodeo.
So the debt ceiling is a law that limits the total amount of money the US government can borrow to pay its bills.
The cap currently stands at roughly $31.4tn (a totally bonkers amount of money). That limit was breached in January, but the Treasury Department has a few “extraordinary measures” it can use to keep the government liquid.
But at some point (what’s being called x-date), even those extra-ordinary measures will exhaust themselves.
If and when that happens, all hell breaks loose.
First up, the government has no more money. It can’t pay for federal employees, the military, Social Security and Medicare. It can’t even pay for the weather stations, which means air traffic would come undone.
The social infrastructure of the world’s biggest economy would go into meltdown.
That’s bad.
Not only that, the US wouldn’t be able to pay the interest on its debts.
Risk and therefore rates in US treasury bonds would explode, and given how central US Treasuries are to global finance, that’s when the dominoes would really start falling.
Moody's Analytics reckon that the share market in the US would lose 20%, and million jobs would be lost. You could probably rinse and repeat that globally.
Now the thing about the ceiling is that its just a number that some politicians decided on. There’s no real reason it can’t be increased.
But politics in the US has become hectic post-Trump. Republicans and deomcrats have to agree on a plan, and agreements are as rare as hen’s teeth in Washington these days.
And you do get the sense that there’s enough nutters in the Republican party these days that they’d be willing to derail the entire economy just to score some cheap political points.
So the risks are bigger than any time recently, I reckon.
You have to think that they’ll find an agreement sometime before x-date (which we don’t know, but could be as early as June 1).
But there’s an outside chance that no agreement is found.
And that’s what makes it such a black swan – low probability, massive impact.
But I can tell you one thing. I’d rather have money parked in property than shares if it did happen.
JG.
Birahanu Hayilu says
My card is declain