Demystifying the Debt Ceiling - Trust Point

Demystifying the Debt Ceiling

US capitol building

In recent weeks, you may have seen news that the country could run out of money by June 1, 2023. Those headlines can seem alarming, but what you might not know is that the U.S. has faced a similar situation dozens of times in the past 60 years.

What is the debt ceiling?

The debt ceiling is a statutory limit set by Congress on the amount of national debt the U.S. Treasury can incur. When the U.S. reaches the debt ceiling, it means that the federal government has reached its borrowing limit and can no longer issue additional Treasury bonds to finance its operations.

A failure to timely raise the debt ceiling could lead to serious consequences. This has happened before; in 2011, a prolonged debate in Congress led to a decrease in the nation’s credit rating, and in 2013, another impasse over the debt ceiling led to a 16-day government shutdown.

Although the implications could be severe, it’s first and foremost important to note that the U.S. government has faced debt ceiling debates increases in the past, and they have never led to a full-blown economic crisis as proper actions were taken to raise the debt ceiling or suspend it temporarily to avoid a default.

What happens when the debt ceiling is reached?

For a period of time, the Treasury has to take “extraordinary measures” to avoid going over the limit. When this happens, the Treasury reallocates funds from different government accounts and suspends certain investments that provide temporary relief and allow the government to continue funding its activities.

If those measures aren’t enough and the debt ceiling isn’t raised on time, that’s when consequences like government shutdowns, defaulting on the debt, uncertainty in financial markets, increased borrowing costs, low investor confidence and reduced consumer spending can become a reality.

Why haven’t they raised the current debt ceiling?

The political negotiations and debates surrounding the debt ceiling within Congress can sometimes be contentious, and today’s political climate is no exception. House Speaker Kevin McCarthy, R-Calif., is in a standoff with President Biden over spending caps and other policy demands, and recent meetings have failed to reach a deal. Talks are ongoing, however, to avoid any disruptions.

How does this impact investors?

We believe the debt ceiling is more of a distraction than anything else for long-term investors.

Ability and willingness are separate conversations when it comes to a debt crisis. Questioning the ability of a debtor to pay has larger implications than questioning willingness. For most investors, debt ceiling brinksmanship leaves a question of when, not if, payment will be received. While it is in the country’s best interest to resolve the debt ceiling soon, we believe it is in the best interest of investors to avoid the noise from these manufactured crises by staying focused on the long-term.

If you have any questions, please reach out to your Trust Point financial team at 800-658-9474.

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