U.S. Government Readies for Latest Debt Ceiling Showdown

Senior Investment Strategist Tracey Manzi looks at the factors that are contributing to the current impasse.

Key takeaways:

  • The U.S. government has hit its statutory borrowing limit.
  • The debt limit is not about new spending, but rather a legislative procedure that allows the government to finance past spending that has now come due.
  • Failure to reach agreement on the debt limit has serious, potentially catastrophic consequences for the financial markets.
  • We expect that in the end, lawmakers will strike a deal and raise the debt ceiling; however, they will likely wait until the last possible moment.

The debt ceiling is back in the spotlight after the U.S. government hit its statutory borrowing limit earlier this year. While there are steps the government can take to continue paying its obligations, these measures only extend for a limited amount of time. Unless policymakers can agree to raise, suspend, or eliminate the debt limit soon, the government could run out of cash to pay its bills as early as this summer. Failure to reach an agreement would have serious economic consequences, including the risk that the U.S. government defaults on its debt. The stakes are high, and it appears likely that our deeply divided government is headed for another debt-ceiling showdown. Divided governments have typically been good for the markets; however, they often spell trouble when it comes to negotiating fiscal matters.

What is the debt ceiling?

The origins of the debt ceiling can be traced back to 1917 when the U.S. was in the midst of World War I. The new law was initially created to simplify the process of issuing debt to fund war operations. In 1939, Congress established an aggregate debt limit, which has been routinely increased or suspended over the years. Since the 1960s the debt ceiling has been raised 78 times. The purpose of the debt ceiling is to establish a maximum amount of debt the US government can have outstanding. Once the limit has been hit, the federal government cannot increase the amount of outstanding debt until Congress authorizes a new debt limit or suspends it for a period of time. Adjusting the debt ceiling has historically been a routine matter that did not garner much media attention or rattle the markets; however, in recent years it has turned into a political hot button. The most notable confrontation, which pushed the U.S. close to the brink of default, occurred in 2011. Past debt-limit showdowns have typically occurred when there is a Democrat in the White House and Republicans have control of Congress.