In the entire history of the United States, not once had the country failed to pay back a debt. And it had maintained its AAA credit rating since the ratings began — until 2011. That’s when the pillar that supports the global economy started to show some cracks.
As a US treasury report notes:
‘In 2011, U.S. government debt was downgraded, the stock market fell, measures of volatility jumped, and credit risk spreads widened noticeably…’
A more severe crisis was largely avoided thanks to an eleventh-hour deal that was finally reached. President Obama, at the time, called the moment ‘the most nerve-wracking of his presidency’. It was the closest the world economy has come to another collapse that could rival that of 2008.
The US certainly got a taste of the repercussions though. From June to August in 2011, consumer confidence fell 22%. Business confidence followed, dropping by 3%. Meanwhile the S&P 500 plummeted 17% during the debt limit squabbling. Total household wealth between the second and third quarter shed US$2.4 trillion.
Just imagine how much worse it could have been if they had failed to raise the debt ceiling. It doesn’t paint a pretty picture.
US at Risk of Defaulting Again
Well, as you’re probably aware by now, President Trump is now facing the same looming disaster. The US is at risk of defaulting on its obligations once more. And just like 2011, Republicans and Democrats can’t reach an agreement.
Trump has already threatened a government shutdown if he doesn’t get support. Heating up debate over the issue as the deadline closes in.
Earlier this week Republicans tried to pair the much needed bill with a Hurricane Harvey relief package. A sly manoeuvre, trying to corner Democrats into passing the bill.
But Trump did what he does best. He made a move that no one expected.
Ignoring his party, Trump secured a deal with the Democrats on his own: Harvey victims get their much needed aid, and the debt ceiling fiasco was calmed.
The dilemma is that the deal is only a stopgap solution. The deadline was pushed back, but only as far as 15 December.
The US stock market rose on the back of the news. Australian markets seemed to have followed suit, as the ASX opened higher today. But, long term, the problem isn’t going away.
It’s set the stage for an end-of-year clash that will have massive ramifications for the global economy.
Make sure you don’t get caught out, by staying clued in. Avoid the catastrophe that is shaping up to be Global Financial Crisis 2.0.
Junior Analyst, Markets & Money