US Debt Ceiling: Three Ways This Can Unfold

15

Yet another effort to get “grand bargain” on the cutting the US deficit and raising the debt ceiling ended in break up. Each side is blaming the other, and the clock is ticking towards August 2nd. Or is it really ticking? Here are three ways this could unfold.

GOP leader John Boehner broke talks with US president Barack Obama late on Friday, after the markets closed. If this is the state of things when markets open on Monday, the dollar is set to decline. Washington is set to be very active over the weekend, and things can change afterwards as well.

  1. A deal is reached: Politicians like to negotiate until the eleventh hour, trying to squeeze every possible achievement before agreeing. The break up in talks could just be part of the game, with a deal reached before August 2nd. If an announcement on progress is made during the weekend, it will help markets.
  2. Another extension: Back in May, treasury secretary Geithner announced that the debt ceiling has been reached, and that creative accounting is used in order to buy time until August 2nd. This may be extended again: according to fresh calculations, upbeat tax revenue could in recent weeks can push back the “drop dead” date to August 9th or August 10th. This can give politicians more time to negotiate (and blame each other).
  3. Bringing the Fed: Ben Bernanke has control of the virtual printing presses. The US central bank could buy up government bonds that are about to mature. The US government will default on these bonds, as it reached the debt ceiling, and the Federal Reserve will see its balance sheet squeeze. Under the current policy of the Fed, with “QE2-Lite” the balance sheet needs to remain balanced, so the Fed will just buy some more.
When I wrote about the third option, it sounded like fiction. But as the clock ticks, the chances of this happening are growing. Geither already met Chairman Ben Bernanke and New York Fed President William Dudley to discuss what happens if the debt ceiling is reached.
All the options are on the table.
How do you think this will unfold?

Further reading:

Get the 5 most predictable currency pairs

About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

15 Comments

  1. Pingback: US Debt Ceiling: Three Ways This Can Unfold | Brian Brown's Official Website

  2. Pingback: US Debt Ceiling: Three Ways This Can Unfold - Forex Prediction | Forex Prediction

  3. If the deal is not reached, will that not cause a stir down on the markets? People will try to avoid the risk by selling their stocks and eventually the dollar value will go up …

    Or not reached deal would mean that the dollar is no longer a save haven

  4. If the deal is not reached, will that not cause a stir down on the markets? People will try to avoid the risk by selling their stocks and eventually the dollar value will go up …

    Or not reached deal would mean that the dollar is no longer a save haven and therefore even the markets start to collapse the dollar will plunge too?

    I guess commodities will suffer too, so CAD dollars will be down too.

  5. A fourth possible outcome is that the victory of obstructionism over initiative encourages the rest of folks in government who are “not getting their way” to adopt the same strategy.

    We could start with air traffic controllers and work our way up through the Judicial and Executive branches and then on to industries who believe themselves more deserving of bailouts than GS and company . . . Perhaps the utilities could leverage their use of the Big Switch for electrrical power, cable, . . .

  6. Pingback: EUR/USD July 25 – Steady in Range as Crisis Crosses the Atlantic | Forex Crunch

  7. Pingback: EUR/USD July 26 – Breaking Long Term Resistance on Dollar’s Fall | Forex Crunch

  8. thomas lynn on

    they should cut the congress pay they don/t need it big company will pay them if the american people don;t vote ever one rep. out than they need to get what they the rep say that the tax break give by bush back in 2002 so they could make job well they took the money and lose job for 10 yrs tell me why

  9. Pingback: USD/JPY: Trading the US Pending Home Sales - July 28 2011 | Forex Crunch

  10. Pingback: US debt crisis: countdown to default | Intentious

  11. Pingback: EUR/USD July 27 – Sliding in Range on Doubts About Summit Restuls | Forex Crunch

  12. Pingback: EUR/USD Outlook – July 25-29 | Forex Crunch

  13. Pingback: EUR/USD July 28 – Ranging Lower as Debt Looms Over Both Currencies | Forex Crunch

  14. Pingback: EUR/USD July 29 – Pulling Off Lows On US Deadlock | Forex Crunch