Every once in a while, the two parties in the United States will fight each other over whether to raise the government debt ceiling. If there is no bipartisan consensus on raising the debt ceiling by June 1 this year, the US government may default by then.
If the US government defaults, it will be an incredible black swan event.
For example, the current credit ratings of the three major rating agencies for the US government are at or near the top AAA. Standard & Poor's also rated AAA to the U.S. government until 2011, but downgraded it to AA+ in 2011 and has not returned to AAA.
Whether it is AA+ or AAA, it belongs to the best quality credit rating, and if this level of treasury bonds defaults, then the rating agency will not do business in the future.
Of course, in theory, AAA does not guarantee that it will not default, if you do not believe it, please refer to the subprime mortgage crisis in '08. So the question is: if the US government does default, how much damage will it cause? To make this clear, let's first briefly talk about how the US government defaulted?
Broadly speaking, if the U.S. government does default, it will occur in one of two forms. These two forms of default can be called "bond default" and "technical default". Bond default means that when the interest or principal of the US government bond matures, the US government is limited by the debt ceiling and cannot pay the interest or principal. Technical default means that the US government defaults on other government payables in order to ensure that bonds do not default on the premise of not breaking the debt ceiling, such as delaying the payment of government department employees and delaying the payment of social security pensions.
Relatively speaking, the second technical default is much less impactful and harmful than the first bond default. So if a 0.1% probability default does occur, then the second default is most likely.
But whether it is the first real default or the second technology default, it will have a big impact on the US government, the dollar and the capital market. Possible injuries include:
1. The stock and bond markets have plummeted. The current capital market should not be ready for a US default. The U.S. Treasury market is the most liquid and largest market in the capital market, so if the U.S. bond market falls sharply, it will definitely affect the bond market and stock market of all other major countries in the world.
2. International investors and other governments' confidence in the dollar has been hit hard. U.S. Treasuries are the most invested assets by other governments and institutions around the world, and if U.S. Treasuries default, many countries will start selling U.S. bonds, triggering a decline in the value of the dollar. Imagine governments around the world selling off U.S. debt, causing far more market volatility than the '08 financial crisis.
3. Interest rates will rise. In 1979, due to staff errors, the United States Treasury debt did not pay about $122 million in interest on time. The mistake was later discovered and corrected in time, but even such an unintentional mistake led to a 0.6% increase in the benchmark dollar interest rate at that time. It is conceivable that if it is really a default on US bonds, the short-term interest rate of the US dollar will rise significantly and exert downward pressure on the stock market.
4. Credit ratings will go down. There can be no more AA+ or AAA ratings, and they may be downgraded directly to B or even junk bonds.
5. 2024 presidential election. At that time, the two parties will definitely accuse each other and criticize each other for being irresponsible, leading to a default by the US government. But relatively speaking, the ruling party (DEM) will be more responsible, after all, they are running the government, so a default may stimulate more voters to support the GOP. Of course, this is not a fixed number, because voters may also think that the GOP is messing around, forcing the DEM to have no way back. But in any case, if there is a real default, the incident will become a key topic in next year's presidential election.
It is precisely because a default could have too much impact that it is unlikely to happen. Never in history has the U.S. government defaulted on government bonds, but this is not the first time the risk of possible default has arisen. During Obama's term, for example, the United States reached its debt ceiling twice in 2011 and 2013, when the two parties negotiated painstakingly at the last minute to raise the ceiling and avoid default. So this time the default risk feels familiar, but it's a bit like "wolf".
Why is it said that "the wolf is coming"? This is because:
First, there is absolutely no need for the U.S. government to default. Her debt is in the local currency (dollars), and in theory, the central bank can print an unlimited amount of dollars from scratch to repay the debt at the push of a button.
Second, the battle over the debt ceiling is a political, not economic, issue. On the economic level, let's talk about passing a bill that raises the debt ceiling. But because the White House and Congress are guarded by different parties, this is a great time for both parties to put on a show.
The purpose of the partisan show is obviously not really to limit the US government's unlimited borrowing, but for next year's presidential election. As long as more voters feel that the other party's party is irresponsible and puts the interests of the party above the interests of the country on a focused event that can gain attention, then the goal will be achieved. However, after putting on a show, in the end, the two parties should also have a tacit understanding, that is, it is almost enough, and there is no need to really break the net.
For example, if we look back at history, we can see that the US debt ceiling has been constantly revised upwards over the past 40 years. Such amendments can always be passed, regardless of which party is in the White House and which party controls Congress. This rule has not been broken so far. So in terms of probability, this "default crisis" is most likely to end with a bipartisan consensus to raise the ceiling as before.
Will the two parties be able to reach a consensus by June 1? Let's wait and see.