As the Debt Ceiling deadline approaches, we thought it would be timely to discuss what this means and potential implications to the economy and the financial markets. To start, the debt ceiling is the amount of federal debt allowed to be outstanding as authorized by law. In terms of your household, think of it as a credit card limit that is maxed out and does not allow for future borrowing unless you request a limit increase. The debt ceiling is currently set at $31.4 trillion and our national debt actually hit that limit in January. Since then, the Treasury Department has been taking so-called "extraordinary measures", which actually just means spending cuts to make sure the government can continue to pay it's bills. If the debt ceiling is not increased in the next few weeks, there is a risk of the government defaulting on their debt.
Raising the debt ceiling is not unusual. It's been raised 45 times over the last 40 years. Recently, it was raised in 2011, 2013 and 2021. Most everyone agrees the debt ceiling issue will get resolved but not without much wrangling over the issues; i.e. spending cuts, what to do with excess covid relief funds, etc. A much greater concern is a potential downgrade of U.S. government debt by one of the ratings agencies, Moody's or Standard & Poor's. A downgrade occurred in 2011 when the US lost its AAA credit rating for the first time and the stock market did not handle it particularly well.
With the deadline approaching, the markets have latched on to the "what if" scenarios increasing overall volatility. Given the other macro issues the markets are currently facing, inflation being the most prominent, it would be wise for the politicians to come together and get something approved to resolve the current situation but to also keep an eye toward future implications. Government debt interest obligations are increasing due to an increasing amount of debt coupled by higher interest rates being used in an attempt to tame the "transitory" inflation. It is our belief that the debt ceiling will be resolved and the markets will find something else to worry about. It might be inflation, the Russia-Ukraine conflict, banks or something else not currently at the forefront but rest assured the pundits will find something.
It is our recommendation to take a long-term approach as there is an endless stream of economic and political uncertainty. It has always been that way; however our access to information has never been greater. There is an old saying, "Sometimes, less is more". The constant flow of information can be overwhelming and to be honest, exhausting. Focus on your goals and let's leave the worrying to the markets.
As always, if you have questions or concerns about your individual situation, please don’t hesitate to contact us.