Raising the Debt Ceiling

I follow political forecasts for a living and it is rare that a political forecast is a true toss-up. Political election predictions tend to approach 100% for one candidate or the other, particularly as that election draws nearer. Even in the most hotly contested elections the leading candidate typically has a 60% or 70% likelihood of victory.

But, as of this morning, the most important political event in the U.S. is effectively equal to a coin flip: will the U.S. government complete a compromise to raise the debt ceiling by the end of July, ahead of the critical August 2 date declared by the President (the likelihood of an agreement by the end of August, also noted on the table, is at 75%). I am going to be following this table closely in the next few days and weeks.

I am tempted to add a few additional data points to this table that speak to the consequences of the debt ceiling not being raised (U.S. interest rates, the S&P rating of the U.S. Treasury Bill, etc.), but the implications of those are tricky. No one really knows what would happen if the debt ceiling is not raised. It is likely that a major priority for the U.S. would be to continue to service its debt; interest on its debt is far less than the revenue the government brings in, thus this would be feasible.

The most dramatic impact of not raising the debt ceiling is likely to be on the economy, where spending would have to be cut drastically. But, all indications are that any compromise on raising the debt ceiling will include dramatic spending cuts. Thus, all of the variables that may be affected by not raising the debt ceiling may be affected similarly by raising the debt ceiling. Stay tuned … more to come!