Author: Wright Jackson
Alarm bells are ringing amongst many traders, with the far-right faction of the Republican Party dominating the House of Representatives, that a debt default could be looming on the horizon.
Ralph Axel, the strategist at the Bank of America, foresees troubling times ahead – “We predict it’s possible that by late summer season or early fall, the federal authorities will briefly be pressured to default on a portion of its each day obligations for a time ranging between a few days to a couple of weeks,” he wrote in a commentary.
“If that’s the case, this can symbolize the primary time in the historical past that the U.S. would default on any of its obligations as a result of debt ceiling legislation. We predict such an occasion would come with a fall in fairness and bond costs, doubtlessly testing Treasury market functioning and liquidity.”
It wouldn’t be stunning if traders completely freaked out, dumping property by the bucketful. “Doubtlessly testing Treasury market functioning and liquidity” could sound technical and anodyne. Despite the odds, a catastrophic implosion of the Treasury market is not out of the question.
Axel Foresees Treasury Fee Prioritization Plan
However, “we’d anticipate Treasury to rapidly announce a cost prioritization plan which ought to shield debt from any defaults and calm markets,” Axel noted. Traders can only cross their fingers and hope that the price is affordable – that would be music to their ears! “We predict any decline in asset costs getting into a default could be a shopping for an alternative because the debt ceiling would finally be raised,” Alex said.
The financial loss incurred by working for the federal government in default may be minor, provided the tenure is brief. Axel’s faithfulness is hopeful, and with some luck, it sounds plausible. Despite the chaos caused by political extremists running rampant, we must ensure that measures are taken to ensure stability. Forming a coalition of almost all Democrats plus a few Republicans to raise the federal debt ceiling should be a breeze.
GOP Collaborators May Face Resistance
Any Republican joining the movement will likely face resistance from the far-right, raising the possibility of a contentious primary battle. It could be a lot better, but thankfully it isn’t! These Republicans might be predisposed to physical aggression. “Axe highlighted the importance of having marketable Treasury debt that would be immune to any defaults to ensure a smooth and orderly recovery of markets when the initial shock has passed.
Axel remarked that although the total value of marketable debt is relatively small compared to other governments’ liabilities, it could be given precedence over all other Treasury payments; and that’s a prioritization plan by the Treasury Department that should be unveiled before reaching the default zone.
Yellen: Debt to Hit Present Restrict on Jan. 19
On Jan. 13, United States Treasury Secretary Janet Yellen sent a letter informing Congress that, starting Jan. 19, the U.S. national debt is expected to reach its legal limit.
Further, “as soon as the restrict is reached, Treasury might want to begin taking extraordinary measures to stop the U.S. from defaulting on its obligations,” she said.
Yellen highlighted the uncertainty of how long extraordinary measures could last, cautioning, “It’s unlikely that funds and extraordinary measures will be depleted before early June. Hence, I implore Congress to take swift action and protect the United States’ full faith and credit.”
The Treasury Department might be able to mitigate the damage by announcing a payment prioritization plan which could protect debt from any defaults and calm markets.
Ultimately, the only way to avoid a debt default is for Congress to raise the debt ceiling. Doing so may be difficult, however, as any Republican joining that effort could face a primary challenge from someone on the extreme right.