Federal Debt Ceiling Fight Is High Stakes Game of Chicken

Republicans and Democrats are engaged in a high-stakes game of chicken, as the two sides fight over whether or not to raise the debt ceiling. The debt ceiling represents the legal limit for how much the federal government can borrow. Since March 1962, the debt ceiling has been raised by both political parties a total of 74 times, according to the Congressional Research Service. Ten of those 74 increases have taken place since 2001, including seven Republican-led efforts to raise the limit under President Bush. Republicans in the House of Representatives, bolstered by a Tea Party movement that has fought for reduced government spending, are insisting they will not agree to another debt limit increase without simultaneous massive cuts in spending. Democrats argue that the consequences of not raising the debt limit are too large to play politics with the issue, and demand that the ceiling be raised and then large spending cuts can be debated. With both sides driving the debt ceiling limit debate to its absolute deadline, the global financial community has to wonder what will happen next. Experts disagree about what — if anything — will happen if the debt ceiling is not raised. Democrats argue that a failure to raise the debt limit would result in the U.S. defaulting on its debts. This would harm the U.S. credit rating, leading to higher interest rates for the government (on its borrowed money) and for U.S. consumers (for mortgages, auto purchases, and credit cards). It could also crush the dollar, as the currency would no longer be seen as a safe haven for global investors. Republicans counter with the argument that any damage done by the failure would be offset by the gains the country would get from a smaller federal debt load. The default, if it were brief, wouldn't even necessarily harm the credit rating of the U.S., as the Treasury department would have enough funding to pay its debts and bondholders, even though it would have to short-change — temporarily— government contractors or folks receiving unemployment or Social Security.

Traders who believe that the debt limit debate will blow over and end up not affecting the United States might want to consider the following trades:

Traders who believe that the debt limit debate might do serious damage to the United States economy may consider taking positions in the following: