Yesterday, Treasury Secretary Janet Yellen sent a letter to Congress indicating that if legislation to raise the debt ceiling isn’t passed, the country could be in default on its debt by as early as June 1. To those of us who work normal schedules, that might make it look like Congress has a month to reach a deal, so it isn’t worth getting upset about, but we are talking about politicians here. Over the next month the Senate will convene for only fifteen days, the House for only twelve. And yet, with the “full faith and credit of the United States,” the thing on which the dollar is based, at risk, the two parties are nowhere near a deal.
So, should investors be worried?
History says no; that this is pretty much par for the course. It seems like every time the debt ceiling is reached, a point in time which seems to come more and more frequently each cycle, we have a “crisis.” But to date, the U.S. has never defaulted on its debt. This time certainly fits the pattern of the previous incarnations of a debt ceiling squabble, with lines drawn not on principle, but purely in an attempt to gain political advantage.
Republican House Leader Kevin McCarthy sounds horrified at the prospect of raising the limit without attaching some spending restrictions, something for which he voted three times as debt increased when Donald Trump was in the White House. Meanwhile, President Biden is equally shocked that anyone would consider linking spending to a debt ceiling increase, even though, as a Senator, he voted multiple times for bills that did just that. Their positions are based purely on the fact that each side believes the other will be blamed should America actually default.
Republicans believe, quite rightly, that any nuance around a default will be lost by the voting public, who typically believe that the President is responsible for the economy and who vote accordingly. Democrats, on the other hand, have simplicity and logic on their side. This is a specific problem with potentially disastrous consequences to which they are proposing a simple cure: a no strings attached bill to raise the ceiling, after which we can move on. Opposition to that, they maintain, is obstructionism for political purposes that puts the country at risk.
The intransigence comes from the likelihood that both sides are right, at least in terms of how their supporters will see it. And in the current highly polarized political climate, that is what matters to House members focused on reelection in generally gerrymandered districts. However, when push comes to shove, which it will over the next twelve working days for Representatives, a deal will be reached. The stigma that would accrue to both McCarthy and Biden should they be the first to plunge America into default is just too large, and the stakes are too high.
Still, they will continue to argue throughout this month, so should investors take any action as the tension ratchets up? It might seem there is little you can do. We know that there will (probably) be a deal, but we also know that there will be the kind of brinkmanship that creates risk, and to which the market will respond negatively. The best thing to do here is probably to ask the question, “Cui bono?”
The most obvious answer is China. They have been positioning themselves and the Renminbi to take over as the world’s reserve currency for a long time now, and a U.S. default would bring that day even closer. However, selling USD/CNY is not really a viable option for most investors and, even if it were, it is a trade with a limited upside. Even though the Yuan (CNY) is now officially free-floating, USD/CNY has traded in a range of 6.31-7.31 for the last five years and is now, at around 6.90, near the middle of that range.
A better option might be to look at other “anti-dollar” options that are more accessible. The obvious one is Bitcoin (BTC). Opponents of the cryptocurrency have been saying it is worthless since it was trading at a few hundred bucks and continued to do so even as it rose to above $60,000. Now they maintain that the drop back to below $20,000 proves their point (as we speak it is just under $28,000). Let’s put aside the stupidity of that argument for a moment, and look at why they say it. It is because, in their eyes, bitcoin is based on nothing, whereas the dollar is based on the “full faith and credit” of the U.S. government. Each time we go through this pantomime of posturing and risk default though, that full faith and credit becomes worth just a bit less and their argument just a little more suspect.
I am not saying, of course, that anyone should sell everything and buy bitcoin, but that just holding some BTC may offer a small measure of protection against the most likely outcome of the debt ceiling absurdity. History indicates that the fight will continue until the last minute, and that will hurt both the stock market and the dollar. Given that, an asset based on the belief that our money is far too important to be entrusted to politicians seems like a pretty good place to hide.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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