The debt ceiling is a cap on the total amount of money that the federal government is authorized to borrow. Congress last agreed to raise this cap to $31 trillion in late 2021.
Lifting the debt limit does not authorize any new spending, it simply allows the government to pay bills already incurred.
Some members of Congress are trying to tie an approval for an increase in the debt ceiling to an agreement for greater fiscal stringency.
In a letter to Congress on Thursday, January 19th, Treasury Secretary Janet Yellen said that the US had reached its debt limit and has begun taking “extraordinary measures” to enable the government to stay current on its bills.
The special measures include suspending investments in government benefits plans, such as the Civil Service Retirement Fund.
The actual moment when the federal government can no longer meet its obligations on time is a function of the Treasury Department’s cash flow, which could change depending on things such as the receipt of tax payments.
Yellen estimates that the government could run out of money, and may have to declare default, sometime in June 2023.
The US has reached inflection points regarding the debt ceiling in the past. In 2011, Congress engaged in a contentious stand-off over spending and the debt that got close to a default situation.
The brinkmanship a decade ago had a negative impact on the financial markets and resulted in a downgrade of America’s credit rating by Standard & Poor’s, one of the main US credit rating agencies.
Last week, Speaker of the House Kevin McCarthy and President Joe Biden held a meeting focused on the debt ceiling issue. The tone following that meeting was constructive, with McCarthy saying “I think, at the end of the day, we can find common ground.”
Given that the government appears to have enough flexibility to stay current on its obligations until June, it’s likely that we’re just at the ‘beginning of the day’ on this issue.
Investors will probably have to suffer through more political posturing, and possibly brinkmanship similar to what occurred in 2011, before the situation is resolved.
The stakes in this political game of chicken are high: Yellen has said that a US debt default would “cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.”
My sense is that cooler heads will prevail in Washington and the US will avert the worst outcome. But if the impasse on the debt ceiling persists into spring and summer, it will become more problematic for financial markets, and more likely cause bouts of volatility and downside for investment portfolios.
RK