Thoughts on the Debt Ceiling Crisis

For centuries, the U.S. has spent more money than it takes in. Even though tax revenues increase as the economy grows, they have been outpaced by spending over time.

The debt ceiling is the maximum amount that the U.S. government can borrow by issuing bonds.

The Treasury Department finances that gap by selling government securities. The “debt ceiling” or debt limit was created under the Second Liberty Bond Act of 1917 allowing Congress to limit how much the Treasury Department can borrow to fund the programs it’s legally obligated to pay for: Social Security, Medicare, military salaries, tax refunds, national interest payments and more. It can be similarly characterized as a credit card limit.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary.

The debt ceiling has been raised or suspended several times to avoid the risk of default.

Raising the debt limit does not authorize new spending commitments. It allows the financing of existing legal obligations.

The debt ceiling has been raised or suspended numerous times over the years to avoid the worst-case scenario, which would be a default by the U.S. government on its debt.

There is often questioning over about who holds U.S. debt – and what this may mean financially and geopolitically. While it’s true that Treasuries are held by other countries (including China), since Treasuries are important to the global financial system, about 77% of the national debt is held either by the U.S. government itself or by U.S. citizens.

The amount held by U.S. government entities is generally not included by economists when considering the total size of the debt, since this is the equivalent of moving money from one pocket to the other. News media numbers focus on total debt rather than “net debt,” and may not provide the most accurate picture.

Many question who holds U.S. debt and what this means financially and geopolitically.

There is concern that growing debt and deficit levels will impact the attractiveness of Treasuries; hindering  the government’s ability to roll its debt, especially given the jump in interest rates. While this is a possibility, it’s not definite where the limits will be. Japan, for instance, has been operating with a debt to GDP ratio of about 250% for years. Though interest rates have definitely risen over the past two years, they have also stabilized and fallen over the past several months.

It is unclear how this will play out politically before the estimated June 5 deadline. The positive stance is that financial markets have taken these events in stride. Historically for the past 100 years,  markets have done well regardless of the exact level of the government debt and taxes. For the last 20 years, the best times to invest have been when the deficit has been the worst. These are times when the government engages emergency spending, which tends to coincide with the worst points of the market. While this isn’t something investors would hope is repeated often, it does underscore the importance of not over-reacting to fiscal policy and politics in one’s portfolio.

There have been several conflicts over the debt ceiling between the White House and Congress, some of which have led to government shutdowns.

It’s important to separate fear and emotions from savings and investments. The debt ceiling and federal debt won’t be resolved anytime soon, and there will continue to be media coverage over the next few months. While investors in the market can’t control what they hear, they can control what actions they take.

The policy analysis provided by Youngs Advisory Group, Inc., does not constitute and should not be interpreted as an endorsement of any political party. The information provided here is for general information purposes only and should not be considered an individualized recommendation or personalized investment advice. Data contained herein from third-party providers is obtained from what are considered reliable sources.  However, its accuracy, completeness or reliability cannot be guaranteed.  Supporting documentation for any claims or statistical information is available upon request.