Political clashes over whether to raise the debt ceiling are scaring investors.
An FKD Feature exclusive

Petty politics are playing a significant role in what’s going on in the stock market. The world is watching to see whether the U.S. will do what it can to prevent a new recession. When President Donald Trump is refusing to budge on a campaign promise, and Republicans start to seem less likely to get anything done in Congress, markets start watching to see what will happen if the U.S. doesn’t increase its debt ceiling. Trump is adding pressure to the ordeal by outlining how he would like the event to turn out.

A divided party

Despite having control of all facets of government, Republicans haven’t been able to pass legislation that the whole party can get behind. The latest example of this was with health care, when they lost by one vote, with three Republicans siding with the Democrats and ultimately ending with Sen. John McCain’s dramatic thumbs down during the vote. Even with the majority in both houses of Congress, the party is divided internally on what to do about the issue.

The leadership of the party in Congress, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, both are promising to raise the debt ceiling, but voting history tells a different tale. Most of the time, Republicans do not vote in favor of raising the debt ceiling. There are times when an overwhelming majority of Republicans in the House did vote to increase the debt cap, which happened because Congress promised to withhold pay from lawmakers if they didn’t pass a budget.

The only complicating matter is Trump, threatening a government shutdown unless there is funding for a border wall. At a rally in Phoenix, Arizona, Trump promised, “If we have to close down our government, we’re building that wall. One way or the other, we’re going to get that wall.”

Consequences of a government shutdown

If the U.S. were to default on its debts, it would send panic through stock markets around the world. The Washington Post outlined the consequences of the U.S. defaulting on its debts and what would happen to the world as a result. The reaction would be catastrophic across stock markets, triggering negative reactions toward U.S. stocks and bonds along the way. Defaulting on its debts would also end the U.S.’ ability to borrow money at favorable rates, increasing interest rates, causing investors to sue the country for their money. Government workers would fear having their salaries cut, basically, anyone who is paid money by the U.S. — from retirees, contractors, bondholders, those waiting tax refunds, etc. — would have to wait to get paid.

The U.S. also would lose influence abroad. Currently, the U.S. dollar is the go-to reserve currency around the world. Defaulting would tarnish the dollar’s reputation for investors, sending them to look elsewhere. And finally, the biggest outcome of the U.S. defaulting on its debt is the possibility of a recession. Being the largest economy also means that what happens to the U.S. will affect the entire world. Sentiment among investors would start a panic and a downward spiral that would have harmful effects on the economy.

Takeaway: Raising the debt ceiling is as much of a political choice as an economic one

The debt ceiling vote will have political consequences as much as it will have economic consequences. Defaulting on the country’s debt could cause panic in stocks markets around the world, starting what could become another recession just as the last one finally seems to be disappearing from the rearview mirror. Whether they pass or fail to raise the debt ceiling, politics will play a significant role in the vote. For many members of Congress, this will make or break their careers with voters in their constituencies.

 

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Posted 09.07.2017 - 04:00 pm EDT