VTI - What Probability Do You Give That The U.S. Government Will Default On Its Debt?

2023-05-22 14:25:06 ET

Summary

• The investment community does not seem to think that the U.S. government will default on its debt.
• The most common feeling seems to be that the government will not "screw up" and tumble into default, and this view appears to be reflected in the stock market.
• The can will again be kicked down the road because the real power in the country will see to it that default is avoided.
• The government policies have worked for a segment of the voting public in the United States, and this segment represents those that will partake in "The Greatest Wealth Transfer In History."
• Yet, the one scary possibility that sticks in the back of people's minds is that maybe the probability of a default occurring is very, very small... but not zero.

Here is a gauge of the confidence that the investment community has in the economic outlook for the United States.

This chart presents the performance of the S&P 500 Stock Index (SP500) from its last historical high of 4,796.56 on January 3, 2022.

On May 19, 2023, the index is 12.6 percent lower than it was on that peak day.

The market was in worse shape than this in October 2022, but has recovered some of its loss since then and has actually been relatively stable during this rise.

And, this rise has occurred with two, not so very good, things hanging over the market.

The two major issues hanging over the stock market right now are the possible debt default of the United States government and the possible further increases in the Federal Reserve's policy rate of interest.

What does the market seem to indicate in terms of investor thinking?

The U.S. government will not default on its debt.

Some kind of a deal will be made and the next deadline for the "new" debt ceiling will be put off...again...until some time (irrelevant) in the future.

Also, investors seem to believe that the Federal Reserve will "back off" from raising its policy rate of interest any further...sometime in the near future.

The picture being drawn here seems to be one of little or no confidence in the government policymakers.

That is, the future policies of the federal government, both fiscal and monetary policies, are seen by investors as basically irrelevant.

The view of the investment community is that the government will continue on doing what it has done in the past.

There is no leadership in the government that will bring the country around to a better future.

The is plenty of government debt "out there" and there will be even more in the future.

There is lots and lots of money floating around the economy created by a Federal Reserve asset bubble, and these funds are apparently overcoming the efforts of the central bank to succeed in its program of quantitative tightening.

And, the investment community doesn't seem to see America's leaders as doing anything better.

What Underlies All This

The Greatest Wealth Transfer In History !

The experience of the wealthy movers in the United States is that the current philosophy that is the foundation of most U.S. government economic policies has supported almost unbelievable advances in the wealth of the top 1% and the top 10% of the country.

And, these advances have occurred as most Americans have supported the underlying economic policies of the government.

The "credit inflation" of the U.S. government, started back in the time of President Lyndon Johnson and President Richard Nixon, has emphasized keeping consumer price inflation under control, while at the same time keeping asset prices climbing to higher and higher historical prices.

As I mentioned above, the S&P 500 Stock Index hit its last historical high on January 3, 2022.

Look at what happened to the index since 2013.

Federal Reserve Chairman Ben Bernanke generated a monetary policy aimed at causing stock prices to increase, thereby creating a wealth effect that would stimulate the economic recovery of the 2010s.

And, what do investors do, observing that stock prices are going to go up...and up...and up?

One can go back to the last thirty-five years of the 20th century and obtain similar trends.

One can also get trends like this in the real estate market, as well as in the commodity markets.

The point is that over the past 60 years asset prices have gone up in a major way, and are associated with the economic policies of both the Republican and the Democratic parties.

And, over the past 60 years, income/wealth inequality has grown, almost constantly.

Furthermore, this performance is expected to be around for many more years.

That's what a lot of people are betting on!

And, That's The Environment

Bottom line...the politicians and policymakers in Washington, D.C. cannot allow a debt default.

The politicians and policymakers in Washington, D.C. cannot allow a monetary collapse.

The world must go on.

At least, that appears to be what the investment community is saying.

The only concern is that somehow...some way...those running Washington, D.C. will, someday, bungle the deal.

There is no real reason for them to "bungle the deal."

Yet, that is the wee, small concern that exists somewhere, way back in people's minds.

Maybe, just maybe, the current crew will screw things up.

What a way to live.

So, what probability would you give the possibility that the government will screw up the negotiations?

It may be very, very small, but if the probability is not zero, people are saying it could happen.

Oh, boy!!!

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