Debt Limit Crisis Playbook

Debt Limit Crisis Playbook

The U.S. is expected to hit its debt limit on June 1st. 

But it will be an entirely manufactured crisis.

And that means there are some important considerations beyond the barrage of dire predictions that have and will continue to be made about it.

Just look at two past crises to see how this one turns out.

The first crisis we’ll look at is the debt limit crisis of 2011.

That too was projected to be a major turning point at the time. 

It turned out to be a complete non-event. 

The dip in stocks that resulted from it lasted about two or three weeks. 

Will this one be the same? 

The best bet is "probably." 

After all, there are definitely some political benefits – as there were in 2011 – to letting the debt limit get hit.

This is probably the best opportunity to be able to blame someone else for the likely recession. 

So that is a likely outcome.

Let it hit. Then solve it a few days later.

You can tell by the complete lack of urgency in dealing with it. 

The first major meeting between the president and Congressional leadership was just announced for May 9th, more than a week away.

They know from history the true impact will likely be temporary. 

But let’s look at another crisis from back then too - the Lehman Brothers collapse in September of 2008.

That was a real crisis and it brought real action.

The Emergency Economic Stabilization Act, the act which created the Troubled Asset Relief Program (TARP), was proposed on September 20, 2008.

It was a bailout plan of $750 billion.

It was passed on October 3, 2008.

In a real crisis it took around 14 days (or two weeks) for the Emergency Economic Stabilization Act to pass.

That’s the speed legislators can act with when faced with a real crisis. 

The debt limit crisis is, in the long run, all theater. 

There’s a good case to build up some cash leading into it all. 

But investors should focus on the far greater trends like technological upheaval, economic malaise, and rising energy prices that will resume after it passes. 

Investors should focus on those because by July they will be a driving force again.