The U.S. debt ceiling: the shocking A.I. predictions

As of June 1, the U.S. will do one of two things. They will raise the debt ceiling, or they will default on international debt. With so many media narratives and conflicting forecasts, it’s not obvious which way President Biden will go, but the consequences of both decisions have global implications.

In an attempt to avoid bias and propaganda, we prompted today’s most powerful large language models (LLM) to analyze the situation, and the result that came back may shock you.

If the U.S. does not raise the debt ceiling

If the United States does not raise the debt ceiling on June 1 and defaults on its debt, it could have five significant and severe consequences for the U.S. economy and even the global financial markets.

A sharp drop in the value of the U.S. dollar

USD is the world's reserve currency, and any default could cause investors to lose confidence in the currency. This could lead to a significant drop in USD value.

Interest rates could rise

If the U.S. defaults, interest rates on U.S. Treasuries will probably rise as investors demand higher returns to compensate for the increased risk of default. This could lead to higher borrowing costs for the government, businesses, and individuals, and further slow down U.S. economic growth.

Market turmoil

A U.S. default would likely cause significant turmoil in global financial markets. Investors may sell off their U.S. investments, leading to a sharp drop in stock prices and bond prices. This could trigger a broader financial crisis.

Reduced government spending 

If the government can't borrow any more money, it may have to reduce spending to meet its obligations. This could mean cuts to Social Security, Medicare, and defense spending.

Negative impact on credit rating

A default could lead to a downgrade in the U.S. credit rating, which would make it more expensive for the government to borrow money in the future. This could have long-term effects on the U.S. economy and its ability to borrow money.

A default could crash USD and the stock market on the same day, and the global markets will be dragged down in a domino effect. Not really a viable option for Biden.

If the U.S. raises the debt ceiling

If the U.S. government raises the debt ceiling, it could have various effects on the U.S. dollar. Initially, raising the debt ceiling may have a negative impact on USD, as it increases the amount of debt the government holds, potentially lowering investor confidence in the currency. Additionally, if the government borrows more money, this could lead to an increase in inflation, which could further weaken USD.

In the longer term, if the U.S. government raises the debt ceiling and avoids default, it could help stabilize the U.S. economy and financial markets. This could eventually boost investor confidence in the U.S. dollar, leading to a currency recovery.

What happens to the stock market?

If the government raises the debt ceiling and avoids default, it could boost investor confidence and support stock prices. Raising the debt ceiling could also prevent additional interest rate hikes, which favors stock price rises.

On the other hand, the uncertainty and political wrangling surrounding the debt ceiling could create volatility in the stock market. If investors lose confidence in the U.S. government's ability to manage its debt, they may sell off their U.S. investments, leading to a sharp drop in stock prices.

Additionally, if the U.S. government reduces spending to meet its obligations after raising the debt ceiling, this could negatively impact certain industries and companies that rely on government contracts or funding.

Conclusion

A gloomy outlook for the U.S. either way. The decision to raise the debt ceiling is critical for the U.S. government to maintain its ability to meet its financial obligations and avoid a potential default. Raising the debt ceiling seems the most likely outcome as it has fewer negative effects. However, it’s not 100% guaranteed, as raising the debt ceiling doesn’t solve the problem, it only buys the U.S. some time. The systemic problems will remain with a new debt limit.

Defaulting would have far more serious and immediate consequences, including reduced government spending, a negative impact on the U.S. credit rating, and a sharp drop in the value of USD. This would lead to significant financial turmoil and potentially trigger a global financial crisis. Limited funds could also result in a total government shutdown. An outcome Biden will likely avoid at all costs.

Either way, USD prices and the U.S. economy don’t yet seem to have a happy ending option, and the starting point for this terrifying tale is June 1. If you are trading U.S.-based instruments such as major currencies or stocks, be ready for the possibility of massive volatility prior to the announcement, and powerful negative sentiment around USD after the announcement.

Trading with Exness will provide some measure of safeguards. Our Exness Stop Protection feature reduces stop outs caused by market volatility. Exness doesn’t trigger stop outs based on the highs and lows of the spread. Instead, the threshold is triggered by the spread average, giving Exness traders a cushion from which to recover. The coming market volatility will probably test every trader's equity limits, so keep your Stop Loss and Take Profit settings tight in the coming weeks and months.

Install the Exness Trade app and get price notifications and breaking news on your mobile. You’ll be able to monitor your trades in real-time and react without delay. Be ready and stay informed. Q3 2023 is shaping up to be a long and crazy rollercoaster ride.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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Author:

Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.