I’ll make this quick. A deal appears to have been reached and the US will not, in theory, default on any of its debt obligatons next week. Some view this as evidence that this is simply a political melodrama that continues to play out with a pre-determined ending, the only thing having changed is the introduction of greater levels of Trumpian kayfabe.
I am less sanguine. My only real evidence is the the prices that bond traders were demanding:
“At the moment, the T-bill market is in a state of dislocation, one in which yields ranged from as little as 2.614% on government obligations maturing on May 30 to as high as 6.881% on the bill that matures two days later on June 1, according to Bloomberg’s data.”
https://www.marketwatch.com/story/debt-ceiling-angst-sends-treasury-bill-yields-toward-6-e8623799
What that tells me is that market thought there was non-trivial risk of debt going unpaid. That also tells me that the market views current US politics as having introduced real risk of default, regardless of whether some fraction of the players intend it as theater or not. That a deal was reached is almost (almost) besides the point.
Yes, media observers often engage is a certain amount of performative credulity to heighten dramatic interest in the story du jour. But I take a Schelling-esque stance on debt default, which is to say that not unlike pre-emptive nuclear strikes, it is something where the mere discussion of it increases the probability of occurrence. Each time our elected officials indulge in this melodrama, the underlying probability of default goes up, as will the cost of serving US debt, making each and every American a little poorer. Add in the current status of the dollar as the global reserve currency, and we’ve got ourselves perhaps the greatest example of concentrated benefits and diffused costs I’ve ever come across. A reduction in global wealth touching upon very nearly every human on earth all for the benefit of a few marginal votes for a couple dozen Congressional representatives.
Maybe I’m being melodramatic now. But honestly, I don’t think so.
Economist Writing Every Day 