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Debt Ceiling Update

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MICHAEL TOWNSEND: Today we’re talking about the debt limit, or debt ceiling. The debt ceiling is literally a cap on the total amount of debt the United States can accumulate. That cap is set by Congress. The debt limit dates back to the 1930s. It was originally created as a way for Congress to provide oversight on the government’s budget. Since the early 1960s, it has been raised more than 80 times. Congress suspended the debt ceiling for all of 2018, but it came back on March 1st of this year. That means that the US Treasury is not authorized to borrow more money to pay current government expenditures.

At this point, the nation’s debt exceeds 22 trillion dollars. In these situations, which have become all too familiar in recent years, the Treasury Department can take what it calls extraordinary measures to ensure that the United States does not default on its debts. These measures include a variety of steps, such as suspending the issuance of state and local securities and changing the way federal retirement funds are invested. The Treasury began taking these steps on March 2nd, but these steps are temporary. They only buy Congress more time to determine its course of action. The exact timing is uncertain. It’s dependent on a number of factors, including the pace of tax receipts.

In this case, most analysts seem to think that the deadline for Congress to act is likely to fall in September. Raising the debt ceiling has become one of the most difficult votes in Congress, mostly because it puts elected representatives in the awkward position of voting to allow the nation’s debt to increase to an even more ridiculous number, like 24 or 25 trillion dollars. It underscores the fact that members of Congress have, for generations, failed to manage the nation’s finances wisely.

Why does all this matter for investors? Well, the United States has never defaulted on its debts, but concern that it might increases market volatility, sometimes significantly. Back in the summer of 2011, Congress dawdled and we came the closest we have ever come to default. There was a double-digit decline in the markets, and Standard & Poor’s, for the first time, downgraded the nation’s credit rating. Congress ultimately did raise the debt ceiling on that occasion, as it has every other time, and Congress is likely to do so again this fall, but there is uncertainty around the timing, and uncertainty around exactly how Congress will vote.

A Congress with split control, democrats have the majority in the House of Representatives, republicans control the Senate, makes this particularly complicated. Add to that the fact that there are a large number of newly-elected members, who have never cast this kind of vote before, and there is no real plan coming together for addressing this issue in Congress. All this just creates an atmosphere of uncertainty that could spark market volatility as we move closer to the deadline.

Congress is bitterly divided on seemingly everything, and what to do about the nation’s debt is just another example of that divide. The markets will be watching, and while it’s probably too early for investors to be overly concerned about now, it’s something to keep an eye on as we move into the summer months.

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On today’s Stock Market Report, Michael Townsend explains the current state of uncertainty surrounding the debt limit and how the markets could react.

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