In the classic tale of Cinderella, a fairy godmother grants her a magical night, complete with a dazzling dress and a pumpkin transformed into a carriage. But the magic has a deadline: at the stroke of midnight, everything returns to normal, and the carriage transforms back into a pumpkin.
Lately, a similar metaphor has been applied to the U.S. public debt. If Congress does not act to raise or suspend the debt ceiling, the country could face a debt default between July and October. A fiscal crisis of this magnitude could trigger a global financial storm.
To make matters worse, the U.S. Congress has released an alarming forecast: by 2029, the national budget deficit is expected to reach unprecedented levels, surpassing even those recorded during World War II. By 2055, it could soar to 156% of GDP.
Of course, these doomsday scenarios are not new. Every time the so-called “X date” approaches, an avalanche of articles and expert opinions emerge speculating on the probability of default and what could happen to the global financial system if it occurs (spoiler alert, nothing good).
After another round of political drama and heated debate in Congress, the debt ceiling is likely to be raised or temporarily suspended, as it has been in the past. However, the underlying problem will not go away but will get worse unless drastic action is taken, even if the S&P 500 ignores it for now.
Cutting government spending already seems dead on arrival, especially if the promised tax cuts are implemented, which would cause deficits to explode even faster. The alternative — lowering borrowing costs by slashing interest rates — is entirely in the Fed's hands, and for now, the data give it no reason to do so.
The idea of easing the tax burden through higher tariffs — supposedly to stimulate domestic production and reduce dependence on the outside — remains an open question. It is still unclear whether such measures will achieve the intended objective.
Meanwhile, as Moody's points out, U.S. fiscal resilience continues to weaken, and the risk grows that the country's declining financial stability will no longer be offset by its exceptional economic strength. In other words, midnight for the government is indeed getting closer and closer.
Does that mean Treasuries are becoming a risky bet? Well, let’s just hope that, for once, the rating agencies sound the alarm ahead of time — rather than after the fact, as they usually do.