Unleashing the 14th Amendment
How Removing the Debt Ceiling Could Impact Market Dynamics
The debt ceiling fight in Congress is largely just political theater, but the financial markets are starting to react to the latest daily updates and developments. Stocks spent much of the week adding to gains when we heard that negotiations were “going well” before dropping on Friday when talks came to an unexpected halt. If the markets repeat the path they took back in 2011, this is right around the time when we could see volatility start to pick up and conditions for equities start to turn negative. Again, this is mostly political posturing more than anything and we know that the government won’t allow a default to actually happen, but it’s how we get there and the actual resolution that will mean the most to the markets.
If the 14th amendment is invoked, which essentially removes the debt ceiling altogether, I think the markets may still end up taking a hit. With no limits in place for debt issuance and spending (even symbolic ones), we could very well accelerate heading down this path where the government keeps accumulating debt without responsibility. The amount that the government is paying in interest on existing debt has already doubled in just the past few years and will continue to trend higher as low interest debt rolls off the books and gets replaced with newer higher cost debt. In the current era of low growth, high inflation, higher interest rate and a mountain of debt, this scenario could turn very ugly very quickly.
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