At the recent IMF/World Bank spring meetings, attended by around 1,000 guests and 1,600 virtual participants, JPMorgan analysts reported that there is a 10% to 15% probability of a U.S. default on Treasury obligations. Some “outlier” views placed this probability as high as 35%. The U.S. Treasury is heavily relied upon as a source of funding for the global economy, and given the critical interconnectedness of debt markets throughout the financial system, it is crucial to evaluate the likelihood of a U.S. default and the possible implications.
The probability of a U.S. default occurring raises concerns over the workarounds and strategies the country may employ to prevent it or rectify the situation. Some solutions that have been proposed include the use of a discharge petition, a platinum coin, or executive action adopting the 14th Amendment. However, JPMorgan analysts claim that these solutions are largely inoperable, increasing the level of concern over the risk of a U.S. default.
A discharge petition is a parliamentary procedure used in the U.S. House of Representatives. It allows a bill that has been languishing in committee for 30 legislative days to be brought to the House floor for a vote without approval from the committee or the House leadership. However, the political environment in the U.S., marked by increasing polarization and partisanship, makes the usage of a discharge petition highly unlikely. It is difficult for either party to garner a majority of 218 signatures to bring such a petition to the House floor.
The idea of using a platinum coin to prevent a U.S. default stems from a legal loophole that allows the US Treasury to mint a platinum coin of any denomination with the aim of depositing the coin at the Federal Reserve. This would create a significant increase in the country’s cash reserves and theoretically allow the government to meet its debt obligations. However, this solution is highly controversial and would likely face significant legal challenges. Moreover, the use of a platinum coin in this manner would be a highly inflationary action that could undermine confidence in the U.S. dollar, leading to further economic instability.
Lastly, the use of executive action via the 14th Amendment has been proposed as a way for the President to effectively bypass Congress and increase the debt ceiling. However, this method is also highly controversial and would likely face legal challenges. Even if the President were to invoke the Amendment, it remains to be seen whether investors and market participants would readily accept the legitimacy of such a move.
The consequences of a U.S. default on its Treasury obligations would undoubtedly be far-reaching and severe, likely resulting in immediate cash flow problems for the country, a sharp reduction in economic growth and a rapid rise in interest rates. Furthermore, investor confidence in the U.S. financial system would be seriously undermined, leading to a significant sell-off in U.S. equities and bonds. This could trigger a sudden and severe market correction, which many analysts believe could lead to a global financial crisis even more devastating than that of 2008.
In conclusion, while the probability of a U.S. default on Treasury obligations remains relatively low, the risks and consequences of such an event are too significant to ignore. It is important for policymakers, investors and market participants to closely monitor U.S. debt levels and political developments to assess the likelihood of this worst-case scenario. Furthermore, alternative strategies and workarounds to prevent a default or rectify the situation need to be explored and assessed, as the current solutions proposed are largely inoperable or politically unviable. As the world’s largest economy and issuer of the global reserve currency, the stability of the U.S. financial system is crucial to the functioning of the global economy, and therefore efforts should be made to minimize the risk of a default to maintain global economic stability.
