Lyn Alden on 'the unthinkable': What happens if the U.S. defaults on debt?
The suspension of the federal debt ceiling ends later this month, and Congress is still in gridlock on how to raise it.
Earlier in June, Treasury Secretary Janet Yellen said that “Defaulting on the national debt should be regarded as unthinkable…failing to increase the debt ceiling would have absolutely catastrophic economic consequences. It would precipitate a financial crisis.”
Lyn Alden, founder of Lyn Alden Investment Strategy, said that this would be a “low probability event.”
“However, some of the things, in let’s say, the Capitol of the U.S. earlier this year were previously thought unthinkable and they still happened so investors have to watch out for these kind of tail risks that could happen,” Alden told David Lin, anchor for Kitco News.
Alden added, “The way the debt ceiling works is you’re not raising the debt ceiling for new debt, you’re raising it to basically pay existing obligations that they’ve already signed into law, it’s about maintaining spending that they’ve already allocated.”
Even if the debt ceiling were not raised, the government still has a few lifelines left before default becomes a course of action, Alden said.
“They have a couple of levers to pull at first. They still have cash at their account with the Fed, so the Treasury General account, so they can draw that down. They also have been in this situation before where the debt ceiling was not raised, and they basically have some weeks or some months of juggling books around, they call it extraordinary measures, to try avoid some of the more tangible effects.”
On the equity markets, Alden said that the markets show less promise for returns now than a year ago, especially given headwinds from potential hikes in corporate and capital gains taxes.
“Looking at the probability of forward returns here, it’s certainly a less attractive environment for equities than it was than let’s say, this time last year, because you’ve had such a strong run, we generally have high valuations across the board, and I think that it’s a good idea to kind of go through your portfolio and make sure you know what you own. Make sure you know what the cash flows are, because I do think we’re in a very mixed environment where many stocks look like bubbles whereas other stocks still look historically cheap out there,” she said.
For more information on the U.S. government's ability to pay back its debts, watch the video above. Follow David Lin on Twitter: @davidlin_TV (https://twitter.com/davidlin_TV).