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Negotiations on the U.S. debt ceiling continue to drag on ahead of a deadline, in part because the conflict could threaten the safety of the global financial system.

If this sounds amazing, This is because: This same scenario has played out before. And even with an 11th-hour solution, many investors may still suffer.

From stocks to bonds and beyond, there is little in the financial system that is not affected by the US debt ceiling. Failure to find a solution before the June 1 deadline could be disastrous, possibly ending government benefits for retirees and veterans — and possibly leading to bankruptcy and other woes down the line.

Despite former President Donald Trump saying this week that Republicans should allow a US default if they don’t get the spending cuts they want, markets are still shying away from this doomsday scenario.

Perhaps this is because the consequences would be dire. In other words, investors still seem to believe that even the most obstinate politicians dare not bring the economy to that brink. After that, familiarity breeds satisfaction. Now that the U.S. is already on the brink of default, the Treasury Department’s “extraordinary measures” to stave off disaster seem more commonplace.

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Economists are going back to the past to figure out how this latest conflict might play out.

“History shows that even if we finally get a deal before the June 1 deadline, the showdown will result in slower economic growth,” Veneta Dimitrova, senior U.S. economist at Ned Davis Research, wrote Tuesday.

As many investors remember, the United States

S&P 500

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It fell 20 percent from April to October that year — undercutting the August deal and downgrading — as the dollar index fell and gold jumped, Dimitrova noted.

While this year’s situation is very different from 2011 for many reasons, what hasn’t changed is the lack of confidence in the market. That uncertainty will continue to drag on the market without a lasting solution, she says. of Perhaps the result will be a temporary suspension of the debt ceiling — for a short period of time, or until September, when Congress debates the budget for the next fiscal year, as lawmakers have done repeatedly in years past.

This fake solution of kicking the can out of the way can delay the problem. Dimitrova said.

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This eliminates the risk of default [for now]”Although it could push it through the year if debt negotiations stall,” she said. “If the spending runs out on this issue, the government will face the double whammy of a default and a government shutdown.”

In addition, she warned, the debt ceiling debate could lead to more uncertainty about US economic policy, which has led to slower economic growth in the past, especially when the government has scaled back spending. This is a worrying parallel as 2023 is already marked by economic uncertainty with rapidly rising interest rates.

Finally, politicians’ repeated willingness to play with fire on the debt ceiling issue has left markets scoffing at the process. But the costs are real for Americans and investors, as history has shown and will likely be again.

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Corrections and enhancements

Ned Davis Research’s analysis of the debt ceiling was published on Tuesday. A previous version of this article incorrectly stated that the report was from late April.

Write to Teresa Rivas at teresa.rivas@barrons.com

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