2023's Debt Ceiling Drama

Absent any legislative workarounds, on June 1, 2023, the U.S. will bump up against the federal debt ceiling. If reached, Janet Yellen warns the U.S. could default on its scheduled payments, and analysts estimate the timing between July and August. The potential for a U.S. default sounds scary, and some would say unprecedented, so let's put this issue in context . Consider the following:

• The debt ceiling is an annual dance that occasionally turns into a grunge metal mosh pit. The United States is the only country that does this to itself, and the U.S. public debt has increased every year since Herbert Hoover was in office. The ceiling increased over 90 times in the 20th century, and this is the 79th debt ceiling debate since 1960.
• The debt ceiling is highly politicized, yet both sides have, and will continue to, raise the ceiling in line with the economy. Check out the scoreboard:
  • Biden:1
  • Trump: 3 (suspended debt ceiling entirely from 2019 to 2021)
  • Obama: 7
  • W. Bush: 7
  • Clinton: 8
  • Bush: 4
  • Reagan: 18
  • Republican administrations since 1960: 49
  • Democrat administrations since 1960: 29
• As the economy grows, so does the debt ceiling, and it’s imperative to always consider debt along with GDP. Imagine if a bank never raised the amount available for a mortgage after the year 1960. The median home price in 1960 was $11,900. So, your mortgage cap would be $9,520, even though the median home price grew to $392,000 in 2022. The debt ceiling works the same way, and the economy continued to grow in 2022 and Q1 2023.
• Markets leading up to most recent debt ceiling standoffs:
  • 2013: September 15-October 15
    • • U.S. Equities (S&P 500® Index) : 0.8%
      • International Equities (MSCI Ex-US Index): 3%
      • Fixed Income (Bloomberg Barclays Aggregate): 1.3%
    • 2011: June 30-July 31
      • U.S. Equities (S&P 500® Index): -2.0%
      • International Equities (MSCI Ex-US Index): -1.6%
      • Fixed Income (Bloomberg Barclays Aggregate): 1.6%
• Possible outcomes to consider:
  • Best case: the debt ceiling is raised before I finish this article.
  • In-between case: the debt ceiling is raised, and a deal is reached to change spending around the fringes.
  • Worst case: no deal reached by June 1.
• If no deal is reached before June 1, we can all expect it to look like another unfortunate government shutdown where government employees and citizens receiving federal benefits see a temporary disruption. Bills will accrue until paid, then be paid in full once a deal is struck. However, the Treasury has every right to pay interest on debt without the approval of congress, meaning the risk of broader bond default is minimal.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Sources: https://www.globalxetfs.com/chart-looking-back-at-past-debt-ceiling-crises/, Zacks Investment Management May 15th 2023 Debt Ceiling, npr.org, treasury.org

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