Market May Have to Push a Debt Ceiling Resolution
May 10, 2023
As I discussed in “A Look Ahead at 2023 – Part II” in February, the debt ceiling crisis will be solved and will be a buying opportunity. That’s because not raising the debt ceiling means we default on our debt. Of course, defaulting on our debt would cause a massive decrease in spending because the government couldn’t borrow anymore. But it also means the total collapse of our stock, bond and real estate markets and a pretty quick 25% to 50% contraction in our economy.
Even talking about it seriously and taking some actions in the direction of not raising the debt ceiling will rattle the markets -- and it may come to that. In fact, a big drop in the stock market may be necessary to push 5 Republican representatives to vote with the Democrats to raise the ceiling. That’s all the votes that are needed to raise the ceiling.
Although political and market pundits would like to see a bi-partisan agreement to raise the ceiling and cut spending, that seems unlikely. It’s possible, but not necessary. If Biden can make enough compromises to satisfy McCarthy, it’s possible. However, what’s needed to raise the debt ceiling are only a very few swing votes.
Again, it’s important to emphasize that getting those votes may take a big drop in the market. However, those 5 votes will be found, if for no other reason than there are many Representatives that have significant stock, bond and real estate portfolios themselves, as do many of their constituents, and they won’t want to see them wiped out.
Once the ceiling is raised, the markets will recover.
It’s worth mentioning that one of the other important issues we mentioned that is positive for the stock market this year is the massive increase in deficit spending. Our deficit is growing almost 50% faster than last year, which is also the reason the debt ceiling issue is coming up in early June rather than in late summer, as previously predicted by the Treasury department.
One other option is for the President and Congress to agree to raise the debt ceiling a little bit so they have a few more weeks to talk about it.
But the end result will be the same, they will raise the debt ceiling, as they always have, and they will continue to borrow irresponsibly until the money printing needed to support this borrowing causes double digit inflation and double digit interest rates.