- Democrats and Republicans are at loggerheads over raising the US debt ceiling.
- Failure to raise the debt cap would cause a total government shutdown.
- Risk-on assets such as stocks could suffer temporary pullbacks, Bitcoin and crypto markets stand to gain.
JAIPUR (Coinchapter.com) – Senate Republicans voted against the Democrats’ proposal to raise the government’s spending limit on Monday. If not raised before Friday, October 1, the debt ceiling would cause a total shutdown of the administrative machinery and a temporary pullback in traditional financial markets. Bitcoin and crypto markets along with gold and commodities will remain off-risk.
Republicans voted unanimously to raise the debt ceiling (three times) while President Donald J Trump was in office. But with Democrats currently controlling both houses of the US Congress, the opposition chose not to comply. The vote ended with a 48-50 result, with 60 votes required to go ahead with the debt ceiling raise.
The Debt Ceiling: What Is It?
The debt ceiling is a cap on the federal government’s borrowing capacity. Generally, the US government falls short of funds to pay for its financial obligations. Therefore, it borrows from the Treasury to pay salaries for federal employees, military veterans, interest on the national debt, social security recipients, etc.
Lifting the debt limit has historically allowed the federal government to finance existing obligations. The US hit its debt limit in July this year. After a two-year extension agreed upon by Congress in 2019.
The US Treasury Is On The Verge Of Running Dry
Therefore, the need to raise the debt limit is urgent. As bureaucratic disagreements over increasing the government spending limit will cause the US administration to cease operations after Thursday and lead to the US Treasury exhausting all its liquidity between October 15 and November 4.
Consequentially, the federal government headed by US President Joe Biden will find it impossible to pay its debts. The first-ever default on the national debt would then destabilize the entire American economy.
“In a worst-case scenario, Moody’s Analytics says a prolonged standoff would cause another recession, this one akin to the financial crisis, with $15T in household wealth lost and 6M jobs lost.”read an excerpt from Wall Street Breakfast: Debt Ceiling And Default, Seeking Alpha
A sovereign debt default would lead to a drastic depreciation in the value and credibility of the US dollar. In addition, money market funds stand to experience large-scale outflows amid a potential US debt default hurting treasury bill prices.
The US bond market would lose significantly, and benchmark interest rates would rise as a result. As a result, Americans would find it difficult to borrow cheap money. That’s because Treasuries serve as a benchmark to interest rates charged on mortgages, car loans, credit cards, and corporate debt.
Stock Markets Could Pullback, Crypto Markets Not So Much
An impending default on the national debt would cause a temporary pullback in stock markets.
“We’re no stranger to debt ceiling crises caused by Republicans. In 2011, a game of chicken led to America’s first credit downgrade from S&P. And the stock market plunged.”observed Former head of Obama Auto Task Force, Wall Street financier, Steven Rattner
Pweople to opt for alternative safe havens. As a result, Bitcoin and crypto markets could benefit, strengthening the asset class’ reputation as a hedge against uncertain situations. Gold and commodity markets would also not stay behind.