We ran a short scenario analysis of the US debt ceiling debates and how this might play out. We think the risk of an actual default is extraordinarily low, but it’s useful to run through the scenarios and policy response in any case. The long story short is that the Treasury and Fed would have to go around Congress and self fund the spending. Although this is unlikely there’s no doubt that it’s operationally possible and so the actual risk of a sustained default is low. We could technically default, but it’s crazy to think that the world’s largest income generating entity is insolvent. So even in the case of a technical default with a missed interest payment or something like that, the ensuing panic would force Congress to compromise.
All that said, none of this is good for future growth as the uncertainty and potential for budget reductions during the negotiations will increase recession risk. But a true insolvency is very unlikely even if there is some chance of a technical insolvency.
I hope this video gives you some peace of mind despite the insanity of the current political environment.