U.S. default – time to run to the hills?

In case you’ve missed it, it’s possible that on June 1 the United States won’t be able to pay its bills because we’ll have breached an arbitrary debt limit. This is hardly a new threat. So far, parties have been able to extend the debt limit because despite a lot of brinkmanship ultimately both parties saw that actually doing it would be bad for their party’s political prospects.

We’re not seeing much of this thinking this time around. In fact, Republicans seem determined to allow the country to default to make a political statement. If they actually let this happen, I am certain they will live to regret it. Like Florida’s war on Disney, it makes no sense and is wholly counterproductive. At best we’d get a mild recession out of the deal, and it will be harder and more costly for the country to borrow money. No one can say how bad it will get because so far we haven’t been stupid enough to do it. But it could get really bad, triggering a sustained national and global recession. One outcome could be that the dollar loses its status as the world’s most protected and fungible reserve currency. It happened to the British pound and before that to the French Franc. That too could have long lasting and inflationary impacts.

Depending on how paranoid you are though it may be time to prepare for more bad times. The markets so far seem to be shrugging off default, figuring we’ll get through it because we always have before. I think the most likely outcome if we get within a few days of it happening is that Joe Biden will declare he can’t let it happen because it’s unconstitutional. Indeed, if you want to remove Joe Biden from office and he didn’t invoke the 14th amendment to stop it, that would be grounds for his impeachment because he swore to uphold the constitution. Section 4 of the amendment clearly states:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

14th Amendment

It’s hard to see how the U.S. Supreme Court could overrule his decision since it would literally be unconstitutional to do so. But no doubt Republicans would try.

Losing your job though, paying higher interest rates and starting a new round of inflation is unlikely to endear your party to the public. Depending on how markets react, breaching the debt limit is unlikely to last long. But if it happens at all it will be abundantly clear who caused it. It would be a wholly unnecessary dalliance with economic catastrophe, likely to cascade across the globe.

What can you do to prepare? You have to assess the likelihood that you will lose your job, at least temporarily, and how you would deal with it. Things in the short run are likely to cost more, so inflation may spike. So if you are paranoid, it might be a good time to sell some stocks and bonds for cold, hard cash.

One of the few good things is that we’ll see this coming. But for some reason so far the stock market isn’t. Which means you can sell some funds now and likely not incur much in the way of losses. We’ve recovered about half of the loss we’ve incurred since markets last peaked. We are fortunate to be cash rich too so there is no particular reason to get more so.

To me what’s more ominous is the signal it would send to the world. It would be pretty much signal that the United States isn’t … united that is and that political polarization is so extreme in our country that at least for one party, it’s our way or effective disunion.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: