President Trump warned on Thursday that an important attempt to increase the legal limit on US government borrowing had become “a mess” – and investors are slowly beginning to take notice…
What does this mean?
The US government spends more money than it makes via taxes and other sources of revenue – so it borrows money to pay for the difference (typically by issuing government bonds to investors). However, there is a legal limit to the amount that the US government can borrow and only Congress (not the President) can increase that limit. The US Treasury Department has said that, by the end of September, the government will not have enough money to pay its bills, including interest on its debt (e.g. bonds) – and a deal with Congress appears far from assured.
Why should I care?
For markets: Markets seem confident that a deal will be made – but the situation is getting more concerning as the deadline approaches.
It would be a serious issue for markets if the US government failed to pay the interest due on its debt (or any debt that expired). So far, there have been few signs that investors think this will happen – although US government bonds that expire soon after the deadline have sold off in recent days. A major credit ratings agency has also warned that it would downgrade its assessment of US government bonds if there is not a resolution soon.
The bigger picture: Political uncertainty risks affecting the economy.
A significant downturn in stocks would likely affect confidence in the economy in general – and falling confidence tends to result in less spending and a genuine hit to economic growth. More broadly, the political infighting within the Republican party makes it even less likely that market-friendly initiatives, like tax reform and spending on infrastructure (like airports), will get passed into law (a failure on those initiatives would likely be negative for stocks).
Originally posted as part of the Finimize daily email.
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