There’s a mechanism in the U.S. Government’s accounting known as the debt ceiling, that was designed as a check and balance on the amount of money the government can borrow. Essentially a cap was put in place so that there’s a limit to how much they can spend, which would be great except for one small problem.
You see, every time they reach the debt ceiling, rather than cutting spending, they just raise the limit. Which kind of defeats the entire purpose. Yet every once in a while a political group puts up a stand, not usually because they really want to stop spending, but as a means of negotiation. And so far, it’s looking like this year’s debt ceiling event is shaping up to be one of those situations.
Again, let’s be clear. I’m not saying to expect Donald Trump to block the raising of the debt ceiling because he’s really all that concerned about the profligate debt financing that goes on endlessly. But he did threaten to shut down the government if they don’t fund his great wall of Mexico, and based on everything we’ve seen so far, at least some probability of a significant event should be priced in.
Is there a chance that the limit will just get raised without much fanfare? Sure. Although if you remember the spectacle that was created back in 2011 when the Tea Party put up a fight to stop the raising of the ceiling that year, there was a period of time when it looked like the U.S. Government was on the ropes.
Gold and silver spiked to some of the highest levels we’ve yet seen, and S&P even downgraded its Aaa rating on U.S. Government debt. Again it’s hard to imagine the politicians pushing things to the point where the government shuts down, especially when the one thing all of them can agree on is their love of spending money that they don’t have.
But if there’s ever been a scenario in which there’s enough vitriol to really push the issue, this would be it. Whether Trump really just wants to stick it to the establishment or vice versa, some probability of a market event needs to be priced in.
Which is not to say that this is the event that will necessarily pop the market bubbles we have watched the Federal Reserve inflate over the past decade. But it could be, and if you’re invested in stocks or bonds, it’s certainly something to watch out for.