Once again, the politician’s south of the border are wrangling over whether to increase the limit of the U.S. national debt-ceiling. It’s a serious matter, failure to do so could lead to defaulting on the U.S. federal debt.
What is the debt ceiling?
The U.S. debt ceiling is the maximum amount of money Congress allows to be borrowed by the U.S. Treasury to support the government’s operations; and make interest payments to the investors and institutions who own government-issued bonds. As stated in the Fidelity Viewpoints article, the debt ceiling is currently standing at $31.4 trillion; it has been increased dozens of times throughout history. Inevitably government debt goes up over time as the size of the economy grows.
As explained in the Fidelity Viewpoints article, the ceiling was reached back in January, since then the Treasury has relied on “extraordinary measures” to continue operations. If Congress does not decide by June, potentially the Treasury will be unable to issue more Treasury securities and the nation could default on its debt. Historically, a deal has always been reached. In the meantime, this political uncertainty may cause market volatility over the next few weeks.
What are the possible outcomes?
If the debt ceiling is not raised, which is highly unlikely, the U.S. would be in danger of defaulting on its national debt. The Fidelity Viewpoints article states that the U.S. would have to operate on a cash-flow basis, meaning that outflows (including interest payments on existing Treasury debt) would have to be funded by inflows (i.e., tax receipts and fees). If this happens, the government will have to prioritize which payments (like principal and interest to bondholders) would be met, and which payments (like social security benefits) could be suspended.
The reason why the debt ceiling discussion is so prevalent in the news is because of the impact it may have in other areas of the economy. If the U.S. defaults on its debt we could see the U.S. dollar lose value, interest rates rise sharply, equity markets decline, evaluating certain securities would become more complicated, the credit markets globally could face severe repercussions; and gold and other commodities could rally.
We believe it is in the best interest of the U.S. Congress to raise the debt ceiling avoiding any of these issues.
“If history repeats, a deal will ultimately be reached. In the meantime, political uncertainty could disrupt financial markets—and also create investment opportunities.” Says Lars Schuster, institutional portfolio manager in Fidelity’s Strategic Advisers group: “It’s unnerving to see these headlines. The good news is that historically volatility in the markets tends to be short-lived.
This could result in a good buying or portfolio rebalancing opportunity for long-term focused investors.” – US Debt Ceiling debate heats up again by Fidelity ViewPoints
This is the fourth time Tracey has lived through a debt ceiling debate in her investing career. She truly believes it will be raised in the end, calming the markets, investors, and politicians alike.
As always if you have any questions regarding your portfolio, please don’t hesitate to contact us.
Have a great long weekend,
Tracey and Paige
Sources:
https://www.fidelity.com/learning-center/trading-investing/debt-ceiling
https://institutional.fidelity.com/app/video/9909416
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