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How Trump's Government Shutdown Threat Could Affect Markets

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Part 4
How Trump's Government Shutdown Threat Could Affect Markets PART 4 OF 4

Are There Solutions to the Current US Debt Crisis?

Political negotiations

In the past, both political parties have realized the consequences of such a logjam and agreed to raise the debt ceiling after coming to an understanding about spending cuts and raising taxes. Politics have made it difficult this time around as the current President Trump looks to cut taxes, fund walls, and raise federal spending by increasing spending on infrastructure (ACM) (VMC), which will require a lot more debt to be raised in the future. The US Congress will likely eventually agree to increase the debt ceiling considering the broader repercussions for the US as well as the world (VTI), but these troubling levels of US debt (TLT) (SHY) will continue to remain a threat to the global economy.

Are There Solutions to the Current US Debt Crisis?

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Economic solutions

The US deficit has to be reduced. Government spending has to be lowered and taxes have to be increased. The problem, however, is that no government would risk taking swift action, as such steps could lead to lower job creation and slow down economic growth.

The only solution is economic growth

It’s the collective responsibility of the US government, the US Fed, and Congress to drive the country towards a stable economic growth path. Extraordinary circumstances in the last two decades pushed for ultra-loose monetary policy from the Fed and lower taxes from the government, and this added to the pressure on the US deficit.

The only way out of this conundrum is in the form of growth. If the US continues to improve economic performance and grows at a rate of 4% to 5%, the country could drag itself out of this debt trap. The country is slowly getting there, but the goal post is a long ways away. We could see high levels of market volatility in the first week of October.

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