DSWM Update: Debt Ceiling Takes Center Stage

‘“Debt Ceiling Takes Center Stage”

May 16th, 2023

 The debt ceiling talks in Washington have taken center stage over the past few weeks, stealing the spotlight from U.S. companies earning season, Russia’s continued aggression in Ukraine, and even inflation. As with much of what happens in politics, each time the debt ceiling process takes the stage there is no shortage of theatrics. A brief discussion of the history behind the debt ceiling can help see through some of the political posturing so we can keep a long-term outlook to its potential impact on the markets. 

The debt ceiling was created out of the Second Liberty Bond Act in 1917. The U.S. was in the midst of World War I and the act allowed the Treasury to take on debt without Congressional approval, but only up to a ceiling that Congress set at $11.5 billion. Fast forward to January 19, 2023, the federal government hits it’s legal debt limit of $31.4 trillion and Secretary of the Treasury Janet Yellen enacted temporary measures to keep paying obligations. She has recently said that without the ability to issue more debt the U.S. may run out of measures to pay its debt obligations sometime next month, putting U.S. debt into default. The word “default” is a very serious word when it comes to any debt obligations, let alone that of the largest economy in the world. However, the expectation is that a default will be avoided, and Congress will agree to raise the ceiling, either temporarily or permanently. The main reason is we have seen this show before, since 1917 the ceiling has been raised over 100 times, 78 of which have been since 1960.  

Despite the ceiling being raised in the past and the fact that the U.S. has historically always avoided a default, however, this does not mean the process of reaching an agreement in Washington over the coming weeks or months will not have a short-term impact on markets. As always with investing, there are an endless number of future unknowns to move the markets. When it comes to the debt ceiling standoff, what history has shown us is that we will see an increase in volatility throughout the talks with conditions calming once an agreement is reached. As investors we approach these debt ceiling negotiations just like the last time this show took center stage, sticking to the long-term investment plan we have developed together with confidence that following the plan will keep us on the path to achieving our future goals.

Please reach out with any questions, and as always, we greatly appreciate your trust in Droms Strauss Wealth Management.

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