The U.S. Debt Ceiling and What It Means for Investors

Everyone's talking about the U.S. hitting the Debt Ceiling. Let's explore what is happening and what it means for investors.

You likely are starting to hear more and more on the news and online that the U.S. will run out of money at the beginning of June. The stories continue that if that were to happen, the government would shut down, stop paying social security benefits, stop paying interest on its debt, etc.

Whether that will really happen is anybody’s guess. The short answer is not likely. To help you understand what is happening, the following is a Primer on the debt ceiling and its issues.

What is the Debt Ceiling?

The U.S. debt ceiling is a legislative limit on the national debt the U.S. Treasury can incur. The debt ceiling was created in 1917 to give Congress more control over the federal government’s borrowing authority.

What Happens When the Debt Ceiling is Reached?

When the country reaches its debt ceiling, the Treasury Department can no longer issue new debt to finance the government’s spending. At that point, one of two things can happen. Congress can raise the limit, as they have done 104 times since 1944 and 10 times in the past ten years, with the most recent being in October 2021. The second thing, which has never happened before but is what has people concerned, is that Congress will not raise the limit, and the U.S. will stop paying its bills and default on its debt.

What is the Biggest Myth about the Debt Ceiling?

The biggest myth or misconception is that this is an economic issue, which it is not. The raising of the debt ceiling is purely a political issue. The debt ceiling can be temporarily raised with Congress agreeing to address spending moving forward so that the limit is not reached again.

What Ultimately Will Happen?

There is no reason to think that the Debt ceiling will not be increased. Two previous times, in 2011 and 2013, Congress waited until the last minute and eventually passed an increase. In both of those times, Congress was controlled by the Republican Party, which opposed raising the debt limit.

This time Congress is split, with the Republicans holding the House and the Democrats controlling the Senate, making it a little easier to pass since the Democrats have signaled a willingness to raise the debt limit.

Even those politicians who are currently against raising the limit are aware of the consequences of not doing so, which is why the likelihood of an increase is much greater despite much of the rhetoric displayed by the media.

When Will the Debt Limit Be Reached?

It is hard to pinpoint the exact moment when the debt ceiling will be reached. Much depends on the timing of receipts and when bills are due.

Treasury Secretary Janet Yellen sent a letter to Congress on May 3 this year, telling Congress that the limit could be reached as soon as early June. While just an estimate, it did create a sense of urgency with the hopes Congress would act.

Regardless of when the limit is reached, there is little benefit for Congress to agree to raise the limits sooner as doing so would mean giving up an opportunity to “horse trade” favors in exchange for a deal. This is what happened in 2011 and 2013, with concessions being made and a deal reached.

Are My Investments Safe?

All investments (even cash, as we have seen recently) are subject to some level of risk. Clearly, a U.S. default on its debt would impact the value of your investments, including those considered safe such as Treasury securities and money market accounts. Valuation declines would likely be temporary, as would a U.S. default since Congress would be forced to work out a deal to go forward at that point.

In summary, the debt ceiling is a complex issue with far-reaching consequences. Understanding the basics of the debt ceiling and the potential risks involved in a default is important. While there is no reason to think that Congress will not raise the debt ceiling, it’s wise to stay informed about the issue.

Please let us know if you have any questions or concerns about the debt ceiling and its impact on your planning. 

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