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Debt Ceiling Failure – Fallout Scenarios

If the debt ceiling is not raised,  positions, not scare tactics,  have already been staked out by some very influential companies.   This, combined with history and common knowledge of how stock, bond and currency markets typically react to uncertainty and instability,  is enough to game out very realistic scenarios of how failure to raise the debt ceiling may play out.

Facts, rather than those ” scare tactics”, as some politicians have accused proponents of raising the debt ceiling, include positions staked out by Moody’s and S & P, Standard and Poors.

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The bond rating agency Moodys, has,  several weeks ago, already publicly stated that if the Unites States does not raise the debt ceiling, there is a serious possibility it will formally review the decades long AAA+ top bond rating U.S. Treasuries now enjoy with the prospect of a downgrade in the rating.   The consequences of a downgrade will be huge, financially and stature wise, for the U.S. government, and will affect many sectors of the financial markets, many of which may be irreversible.

If U.S. Treasury bills, also known as “T-Bills”‘s ratings are downgraded,  this will cost the U.S. Treasury many billions of dollars, continuously and indefinitely into the future, as opposed to holding on to the current highest bond rating.  If the U.S. Government misses the true deadline date, even the discussion of looming failure to pay debt obligations, Social Security or medicare payments,  and much more so, actually not paying them,  will surely cause the stock market to spiral down significantly in the short term.

A significant dive in the stock market would reverse one the few relatively bright spots in the fragile recovery of the last year.    The effect of the government being forced to pay higher rates of interest on Treasuries will further dampen the market, along with the knowledge that the credit rating and standing of the United States is declining.   An increase in Government treasury bills may well force an increase in the Prime lending rate.

This will arguably force an increase in bank lending rates, credit card rates, automobile loan rates, as well as personal and business loan rates.    Expect the stock market to continue a downward trend.

At this point, the dollar will surely have to suffer in world market currency trading.   Prior to the dollar dropping, currency traders will likely sell off dollar holdings in anticipation of the decline.

If it appears the debt ceiling issue will not be resolved in time, look for foreign countries that hold large dollar currency reserves, such as China, Japan,  and the European union, who are surely watching closely right now, to think hard about hard about dumping a significant portion of their dollar reserves and converting to other currencies is a good idea.

Some of the same countries, envious of the dollar’s position as the worlds reserve currency will use this event as an opportunity to call for the replacement of the dollar as the reserve currency with their own.   There will be calls for O.P.E.C. to review trading in the dollar, which the U.S. will furiously resist.    Chances are, if the debt ceiling issue is resolved in a short term fashion, the dollar losing it’s place as the reserve currency will not come to pass.    However, if the issue is not resolved in the short term, the possibility of this happening increases.

If payments such as military salaries, social security check, medicare and medicaid are cut, for U.S. citizens, also known to the politicians as voters,  the real meaning and consequences to them of the commonly used term politicians term “spending cuts” will forever sink in.    Voters like the term spending cuts, as long it any spending cut does not affect them.    Once it does, expect immediate and loud public howls and protests.    One need look only at large public sector spending cuts by government in most any country in the last few decades and the ensuing public reaction to determine the very likely reaction.

Politicians will at some point, shortly after failure to raise the debt ceiling, feel immense pressure from many directions and will take steps to raise the debt ceiling.     However, at that point, some of the damage will not likely to ever be unwound.

Even if this momentary man made crisis is solved in time,  these same issues will arise in the near and medium term,  just at a much slower, less painful fashion.

The inescapable pain and pay me now, or pay me later, will have to be dealt with.

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