Navigating the Impacts of US Debt Ceiling Negotiations on Markets and Individuals

The game-theoretic aspects of the US debt ceiling negotiations suggest that cooperation is the most likely outcome, as the negative payoffs associated with not cooperating are potentially so large for both sides. The political, financial, and economic costs of default are thought to be so disastrous that a deal will be struck before a default occurs. The Biden administration has more attractive fallbacks than House Republicans, including appealing to the 14th Amendment, issuing premium bonds, or minting a platinum coin. While investors may be complacent to the risks, the relative calm of market pricing appears warranted by the relative strengths and weaknesses of the parties to the negotiations.