To start off, while nothing in life is certain, it is nearly impossible to imagine that the United States will default on its debt.
History Has a Way of Repeating Itself
What is happening now is a replay of what has happened several times in our history, most recently in 2011 and 2013.
In 2011, Democrats controlled the White House and the Senate with the GOP in control of the House, the same as we have today. Interestingly enough, Joe Biden was the Senate Leader at the time. On July 31, 2011, two days prior to when the Treasury estimated the borrowing authority of the United States would be exhausted, Republicans agreed to raise the debt ceiling in exchange for a complex deal of significant future spending cuts. The crisis at the time sparked a significant decline in the markets only to have them rebound back to previous levels and higher within 4 months.
In 2013, the political make-up on the Hill was the same as we have today. The battle to increase the debt ceiling was basically the same as it is today: Republicans refusing any deal that did not include spending cuts and Democrats insisting on a clean debt ceiling raise. During the entire months long debates and extraordinary measures to keep paying the government’s bills, the markets showed only minor volatility followed by the beginning of a multi-year bull market.
While the outlook for the markets today differs from those past two periods, the takeaway is that such political battles have had little lasting impact. All the blustering playing out in both political parties make for gloomy news headlines, but reality will set in and something will be cobbled together to “kick-the- can” down the road for the battle to continue another day.
To quote an old political operative from years ago: “Never let a good crisis go to waste!”
