If you think we have been here before you are right, back in mid 2011, when the House of Reps (Republicans) and President (Democrats) played political chicken over the debt ceiling. One side (D) wanted to raise taxes, the other (R) didn’t and instead wanted to cut government services. The result of which saw equity markets fall and US Bonds losing its long held AAA rating by Standard and Poors.
This time around we AGAIN have a political standoff which has resulted in the shutdown of some US Government departments simply because the government is unable to pay its public servants (employees). Then there is the need for debt ceiling to again be raised by 17 October if it wishes to make good on its debt repayments to US Government bond holders.
Raising the debt ceiling should be a simple accounting exercise; instead it tends to become a game of “fiscal chicken” between the Republicans and the Democrats.
The fact that the outcome of a default would be so unprecedented is, of course, the biggest single reason why things are unlikely to get that far. But someone has to blink.
For as long as this remains an issue, markets will be volatile. But resolution should lead to a strong pickup as uncertainty is removed.
Dr Shane Oliver provides a good insight to what these acts of political brinksmanship may mean for equity markets in his latest article.