The Impending Political Crisis That Could Sink America

Elect some clowns…expect a circus, as they say. 

Forgive me here—I am not trying to be outwardly political. I largely try to stay away from the third-rail of American life because it’s so easy to rile people up, even unintentionally. So, I ask you not to read this as me taking sides but, instead, as me voicing a concern about what is very likely to happen later this year and which would have hugely detrimental affects on our financial life. 

Though politics is as the wrapper for this column, the heart of it is the debt, the dollar, and default. 

We start a dozen years back, in 2011… 

I remember it well. Republicans had just recaptured control of Congress at a time when a Democrat was running the White House. Republicans had won back Congress on their promise to roll back America’s spending. They came into the 112th Congress ready to slash the budget. 

Democrats, of course, would have none of that meshugas. 

Thus, the parties faced off in a historic debt-ceiling debate. 

Now, before going on, let me define the debt ceiling: It’s the legislated amount of national debt the U.S. Treasury can issue in a given year to pay Uncle Sam’s bills. Most years, the government runs up against the limit—the debt ceiling—and extends it without much handwringing. That has happened now nearly 80 times since 1960. 

Like I said, not a big deal. 

But 2011 was different. 

The debt-ceiling debate was pushed so far that America was literally days away from defaulting on its debt, an event that would have had global repercussions. 

Bond-ratings agencies actually downgraded American debt. Consumer confidence plunged. Job losses accelerated as businesses prepared for a financial catastrophe. The stock market plunged by nearly 20%, approaching official bear market territory. 

But all of that was small beer compared to what could have happened. 

In the wake of the 2011 debt-ceiling crisis, the U.S. Treasury compiled a report on what the event could have meant, hoping (it would seem) to remind politicians on both sides of the aisle that they have a responsibility not to act like petulant children when it comes to managing the finances of the world’s most important economy and currency. 

This is the opening paragraph to the press release that Treasury put out: 

The U.S. Department of the Treasury released a report…on the potential macroeconomic effects of debt ceiling brinksmanship. The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse.  

At the time, the non-partisan U.S. Government Accountability Office found that the debt-ceiling crisis directly lead to increased “borrowing costs of about $1.3 billion in fiscal year 2011. However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011.” 

I tell you all of this because of the recent D.C. drama. 

Once again, the Republicans have regained Congress during the reign of a Democratic president. And 2023 is clearly shaping going to be a contentious year…to put it mildly.  

Already, Republicans had to vote—over and over and over—on who would become Speaker of the House. The winner, California’s Kevin McCarthy, suffered 14 defeats before finally winning on the 15th vote. 

He sealed his victory after offering a host of concessions to a faction of his party. Two of those concessions are relevant to where we’re headed: 

1. He agreed that a single congressional member can call for a vote to oust him from his position, a position McCarthy covets in a way that is almost lustful. 

2. A promise to hold the debt-ceiling hostage unless there are big cuts to the federal budget, in particular to Social Security and Medicare.  

What seems obvious here is that a fiscal crisis is brewing… 

Both political parties today are far more polarized than they were in 2011. They pretty much despise each other’s existence. It’s going to get ugly.  

All of which means that 2011 could very well look like an episode of Sesame Street relative to what 2023 has in store for us later this year.  

But this is what happens when clowns run the circus—and I mean that from a multi-party point of view. Extremist Republicans and Democrats alike are doing yeoman’s work toward destroying the best of America. And that means that both sides of the aisle regularly have a very real impact on financial markets and, in turn, you and me and our retirement savings and financial security 

In short, political antics, regardless of party, can and do wipe out trillions of dollars of wealth. 

If we are headed for a debt-ceiling showdown later this year, and all the evidence supplied directly by the Republican party and its leadership suggests we are, my gut tells me that this time no one is going to back down. There is so little room for compromise. Republicans have already announced they will burn down the house if the Democrats do not allow big cuts to Social Security and Medicare. (Again, I stress that those are Republican sentiments that I am simply relaying in explaining the impacts of those potential actions.) And Democrats will never back away from their social safety-net ideals. 

Neither side is spending enough time thinking about a default or the impacts that the Treasury Department says such an event would have on the U.S. and the global economy.  

So be prepared as the 2023 debt-ceiling debate heats up in the next few months. We have, it seems, two outcomes: 

1. The federal budget is slashed, meaning Social Security and Medicare lose. And as those safety nets are dismantled, America grows poorer, leading to a long economic and healthcare decline. 

2. America defaults on its debt…and financial hell breaks loose globally. 

Grab your popcorn. The circus begins very soon…