Depending on who you listen to, this is all the time left before the global economy comes crashing down, as the result of the US defaulting on its debt obligations.
While many economists believe it won’t come to this, 18,720 minutes is all that remains for Democrats and Republicans in the US to find a solution that will either suspend or increase the current US$31.4 trillion debt ceiling.
Those advocating the ‘no default’ position cite precedent as the main reason for their confidence, given the US has increased the ceiling many times since 1917 and has got very, very close numerous times, most notably in 2011, but without going into default.
However, is ‘precedent’ something that can be relied upon in this current Republican-dominated Congress?
There are quite a few emboldened Congressmen and Congresswomen that either can’t see or don’t care about the dangers of a debt default, seeing it as a political wedge and blame strategy. Even former President Donald Trump, who previously said he couldn’t understand how anyone would use the debt ceiling as a negotiating point, is now openly egging on Republicans to let the whole thing blow up.
There are three likely outcomes to emerge over the next 18,720 minutes.
- The debt ceiling is increased ahead of the potential default date. In every instance in history, this has been the eventual outcome, and many economists, including those at JP Morgan, expect this year to be no different.
- The US goes through 1 June without a ceiling increase, but the Treasury still makes interest payments to avoid a technical default. In JP Morgan’s view, to avoid default, the government would prioritize security payments at the expense of cuts to discretionary, or even mandatory, spending.
- The US goes through 1 June and delays payments (i.e. default). This would be the worst case and least likely scenario. It’s hard to say what the full consequences would be, but it’s likely the reaction across financial assets globally would be swift and harsh.
In the default scenario, it’s hard to see it as a winning political position to sit on your hands and do nothing as wealth is destroyed and jobs lost, so it may well end up as a short-term blip with sensible heads on both sides finally prevailing.
Regardless of the outcome over the next 18,719 minutes (clocks are ticking), the question remains on whether the US Treasury would need to trade with a permanently increased risk premium (i.e. investors would demand to be compensated more for taking on greater risk).
The “risk-free” rate that is synonymous with Treasuries, would be a term of the past.
For investors, what do the next 18,719 minutes mean for their investments and strategy? Do you play the long game and hope, as noted above, that any default hit would be short and sharp with a quick correction? Do you diversify your portfolio into countercyclical assets like gold (or even some cryptocurrencies)? Do you get ready to pounce on a great buying opportunity when quality stocks become ridiculously cheap?
Everyone’s circumstances will be different, and these are all discussions to be had with a licensed financial advisor or broker.
What is certain is that nobody has any real certainty over what will play out over the next 18,718 minutes – not the US President, not the leaders of the Democrats or Republicans and not the high paid boffins on Wall Street.
Strap yourself in.
