The Impending Debt Ceiling Crisis: Consequences, Risks, & Political Gamesmanship

If the debt ceiling is not increased, it can have significant consequences for the economy and the financial stability of the United States. The debt ceiling is a legal limit set by Congress on the amount of debt the U.S. government can accumulate to fund its operations and meet its financial obligations. If the debt ceiling is not raised, the government will be unable to borrow additional funds to cover its expenses beyond its current borrowing limit.

To avoid the potential negative consequences, it is crucial for Congress to raise the debt ceiling in a timely manner to ensure the government can meet its financial obligations and prevent a default. Raising the debt ceiling does not authorize new spending but allows the government to borrow money to cover existing obligations that have already been approved by Congress.

Using some of our cynicism, we all know that politicians own stocks and bonds, and will work for their own self interests. The link is for a Capitol trade tracker that monitors any trades that politicians report on. They are required to report trades above $1,000 within 45 days. Because of this, we believe that politicians playing a game of chicken can potentially hurt their own wealth if they crash the economy.

Here are some potential consequences of not increasing the debt ceiling:

Government Shutdown: The government may be forced to shut down non-essential services and furlough employees if it doesn't have enough funds to operate. This happened in previous instances when the debt ceiling was not increased, such as the government shutdown in 2013.

Default on Debt Obligations: The U.S. government borrows money by issuing Treasury bonds and other securities. If the debt ceiling is not raised and the government exhausts its available cash, it may not be able to make timely payments on its outstanding debt obligations. This would be considered a default, which can have severe consequences for the economy and financial markets.

Credit Rating Downgrade: A failure to raise the debt ceiling and a potential default on debt payments could lead credit rating agencies to downgrade the U.S. government's credit rating. A lower credit rating would make it more expensive for the government to borrow money in the future, as investors would demand higher interest rates to compensate for the increased risk.

Market Volatility and Investor Confidence: Uncertainty surrounding the debt ceiling can lead to increased market volatility and decreased investor confidence. Investors may become more cautious, causing stock markets to decline and interest rates to rise. This could have a negative impact on the overall economy.

Disruption of Government Programs: The lack of funds due to the debt ceiling limit could disrupt various government programs and services, including but not limited to healthcare, education, infrastructure, and defense. These disruptions can have wide-ranging effects on citizens, businesses, and the overall functioning of the government.

The previous debt ceiling debates have provided some lessons and insights into the potential consequences of not raising the debt ceiling. Lawmakers might take these lessons into account, potentially leading to different strategies and outcomes. However, it's important to note that political dynamics are currently at a stalemate and the tendency is to believe that nothing will get done.

In the event of a default on government debt, both the interest payments and the principal could be at risk for investors. The specific impact on investors would depend on the nature and severity of the default.

Interest Payments: The government may be unable to make timely interest payments to bondholders and other debt holders. This means that investors who hold government debt would not receive the scheduled interest payments they are entitled to. The extent to which interest payments are affected would depend on the duration and severity of the default.

Principal Repayment: There is a risk that the government may not be able to repay the principal amount owed to investors upon the maturity of the debt instruments. This means that investors could face a loss of their principal investment. Again, the magnitude of the risk to principal would depend on the severity and duration of the default.

It's important to note that a default on government debt is bad for everyone (including politicians and their donors), and steps are usually taken to avoid it. The U.S. government has historically prioritized meeting its debt obligations and has not defaulted on its debt. However, in the event of a prolonged or severe default, investors could face significant financial losses in terms of both interest payments and the repayment of principal.

Since its introduction in 1917, the debt ceiling has been raised or revised over 100 times. The frequency of debt ceiling increases has varied, depending on economic conditions, fiscal policies, and other factors. The need for raising the debt ceiling arises when the outstanding debt approaches or reaches the existing limit, and Congress must authorize an increase to accommodate additional borrowing needs. It's important to note that in some instances, the debt ceiling has been suspended temporarily, allowing the government to borrow without a specific limit for a certain period.

Throughout its 100+ year history, the debt ceiling raise was more of a formality. The contentiousness has only recently been an issue starting with 2011. There was also fierce debate in 2013 and 2018. While there were initial sell offs in 2011 and 2018, the market recovery was quick and strong. In 2013, the market was up 30%.

DISCLOSURES:

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

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