We are once again nearing the debt ceiling limit and the debate about the United States paying their bills. While this news is worrisome, we have seen this show before, as the graph below highlights.
So, what exactly is the debt ceiling and what does it mean for you?
What is the debt ceiling?
The debt limit, also called the debt ceiling, is a cap imposed by Congress on the total amount of money the United States can borrow to fund the government and meet its financial obligations. Because the federal government typically spends more than it brings in through taxes and other revenue, it runs a deficit and must borrow money to pay bills and obligations such as social safety net programs, interest on the national debt, and salaries for members of the armed forces.
An increase in the debt limit allows the government to continue spending money on existing financial obligations, however, it does not authorize any new programs. Congress set the current debt limit of $31.4 trillion in December 2021, after setting it at $28.4 trillion on August 1, 2021.
What does it mean for your investments?
Charter Oak’s advisors are monitoring the debates in Washington for signs of progress and reminding our clients to remain long-term, goal-focused investors. In fact, if we use history as a guide, we can see the stock market did react negatively in prior debt ceiling standoffs in both 2011 and 2013, only to have substantial gains in the 12 months post debt ceiling increase.
What does this mean for other financial transactions?
There is a lot of speculation in the news about what will happen to mortgage rates and credit card rates. While it is possible that an increase in government borrowing costs would also increase consumer borrowing costs in the form of mortgages, car loans, and credit card rates – it is also possible that government borrowing costs may actually fall as investors rush into the “safe” U.S. Treasury bonds. While this seems counterintuitive, this is exactly what happened in 2011, as the world still looked to the U.S. as the safest investment in the world.
This is where the greatest damage may be done, to that of U.S. credibility. The media is awash in experts discussing the China and U.S. new cold war, and what it means for the world and global investors. And while the U.S. would most certainly lose some status in the global order, the United States will continue to be supported by its strong economic fundamentals, excellent market access and financing flexibility, and favorable long-term prospects, along with the dollar's status as a global reserve currency.
As Warren Buffett said, "It's never paid to bet against America. We come through things, but it's not always a smooth ride."
Maintaining discipline can be challenging during extended periods of volatility, but that's when it's most important - and that is why you have your team at Charter Oak. We are committed to your long-term financial success and we wish you a lovely Memorial Day weekend, the unofficial kick-off to summer 2023.