To identify hedges, maybe start by extrapolating the trends that happened after the August 2011 S&P downgrade of the United States' debt.
Per
Wikipedia, the
consequences included:
> 5-7% one-day fall in stock prices. About an 11% fall over the span of 2 weeks around the downgrade.
> Treasury bonds (the subject of the downgrade) and the USD both rallied in a flight to safety. TLT rose over 20% between July and September.
> Gold, as measured by GLD, rose 27% between 7/1/11 and 8/22/11, before entering a falling trend. To profit, you'd have had to sell into exactly the outcome you feared rather than holding for several months! Also, the peaks and valleys were narrow, so a gain of 5-10% is all a mere mortal could have expected out of gold.
> European stocks, already precarious due to their own debt crisis, fell harder than US stocks.
And this was the response to a small downgrade by just one out of three ratings agencies, not even an actual default. In the event of an actual default, I'm not sure if the treasuries would do as well as they did in 2011. So I'd suggest gold or put options on stock indices as the best way to hedge.
A safe but bearish portfolio might look like a bunch of FDIC-insured cash deposits plus protective puts securing the value of any stocks, plus a small allocation to IAU or GLD. For the small gold allocation, I like the idea of using call options. Gold is not particularly volatile, and options are priced on past volatility, so if you think the price of gold is going to become more variable in the future, calls are a bargain because they don't price in this macro information. Long calls also offer a defined maximum loss, which helps with the budgeting aspect.
Long term, it's not clear what would happen in the event of a US default. Certainly all three ratings agencies would have to downgrade the US just to keep their credibility. More importantly, the US dollar would face lots more competition as the global reserve currency. If the USD ceased to be the global hegemon, American standards of "middle class" living would start to resemble European or Mexican or Southeast Asian standards because the cost of imports would no longer be subsidized by a currency everyone needs. If US financial markets lost their foundational asset - guaranteed risk-free treasuries - financial trade could move overseas. London is experiencing this now, due to a similar political miscalculation by their fools-in-charge.
Currently, Congressional Republicans are calculating that Biden won't accept the risk of a severe recession during his term in office, because voters will blame him for it and elect a Republican president in 2024. Thus they're trying to repeal all of Biden's legislative agenda of the past 2 years through extortion. Biden, on the other hand, probably sees that a recession is inevitable anyway, and would be happy to pin the blame elsewhere while beating up the Republican party from the bully pulpit for not doing the constitutionally-mandated job of Congress. So yes, all the ingredients are in place for an economically destructive standoff and own-goal.
