US Reaches its Debt Ceiling! What Does it Mean?
First of all, what exactly is a Debt Ceiling?
In 1917, the United States established a law creating the first debt ceiling. The debt ceiling is a self-imposed limit on government borrowing and was put in place to discourage reckless spending.
Recently we have seen the country reach its current debt ceiling of $31.5 trillion. Failing to agree to raise this limit and risking a potential default could have catastrophic consequences for the US and quite frankly the rest of the developed world.
This is not the first time they have been in this situation though. Its actually the 79th time since 1960 that the US have raised the debt ceiling. Knowing that, I personally think that there is a very high chance they agree to raise the limit.
Failing to do so would cause increased borrowing costs, global financial market instability, credit downgrades and many more serious negative consequences.
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If the Debt Ceiling is Raised, What Could it Mean for Financial Markets?
Assuming the limit is raised that means the US will be printing more money. In the long run I fail to see how this is a positive outcome for the country as its Debt to GDP ratio is already at 120% but that is an article for another time.
If the country prints more money, we generally see the price of financial markets rise as well. For the past 15 years, when the central bank prints money, asset prices seem to rise. Let me bring your attention to the graph below.
The black line is GMI, the global liquidity from 2008 until now and the green line is the NASDAQ.
To put it into perspective a perfect correlation is 1 and the correlation between GMI and NASDAQ is 0.97. Between GMI and Crypto its 0.86.
97% and 86% respectively.
So, in my opinion, it’s a high probability that the debt ceiling is raised, which means it’s a high probability that they print more money which will lead to further increase in asset prices. Again, this is not financial advice, simply my opinion.
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