The debt ceiling is a term used to describe the legal limit on the amount of money the United States government can borrow to fund its operations. It is a limit set by Congress on the amount of debt that the federal government can legally issue by borrowing money. The debt ceiling is a crucial component of the US government's financial management and has significant implications for the economy. In this blog, we will explore what the debt ceiling is, the risks of not raising it, and why it will inevitably be raised.
What is the Debt Ceiling?
The debt ceiling is a limit on the amount of money the US government can borrow to fund its operations. It is a statutory limit set by Congress on the amount of outstanding debt that the US government can have at any given time. The debt ceiling is essentially a legal borrowing limit, and when it is reached, the Treasury Department is unable to issue new debt to fund the government's operations. The Treasury Department can only pay for existing government programs using cash on hand, which can quickly run out.
Did you know the US and Denmark are the only two countries that have a debt ceiling and require their governments to vote on it and set the limits? Most other countries set their debt limits as a percentage of their GDP. The reason why the US has chosen to adopt this approach is not entirely clear, but it could be attributed to a variety of political factors. It may be linked to the US political culture, which tends to emphasize theatrical debates and grandstanding, as the debt ceiling provides a high-profile opportunity for lawmakers to voice their opinions and concerns about government spending.
The Risks of Not Raising the Debt Ceiling…
Not raising the debt ceiling could have severe consequences for the US economy and financial markets. If the debt ceiling is not raised, the government will be unable to borrow new funds to finance its operations. This means that the government will have to rely on the cash it has on hand to pay its bills, which can quickly run out. If the US government is unable to pay its bills, it could default on its debt obligations. A default by the US government would have severe consequences for the global financial system, as US Treasury securities are a cornerstone of the global financial system.
A default by the US government would also lead to higher borrowing costs for the government, which would be passed on to businesses and consumers in the form of higher interest rates. Higher interest rates would make it more expensive for consumers to borrow money to buy homes, cars, and other goods, which would slow down economic growth. In addition, a default could lead to a sharp drop in the value of the US dollar, which could lead to higher inflation and a weaker economy.
Why the Debt Ceiling will be Raised…
Congress has several options to address the debt ceiling issue, including taking no action and allowing the US to potentially default on its debt, voting to raise the current $31.4 trillion debt ceiling, or suspending the debt ceiling.
Historical precedent suggests that a split Congress should not pose a significant obstacle to raising the debt ceiling. President Biden has invited key members of Congress to the White House to discuss and work towards a resolution.
There are several reasons why Congress will ultimately raise the debt ceiling.
- First, not raising the debt ceiling would be too risky for the US economy and financial markets. A default by the US government would have severe consequences for the global financial system, and Congress is well aware of this fact.
- Second, raising the debt ceiling is necessary to fund the government's operations. Without the ability to borrow money, the government would not be able to pay its bills, which would lead to a government shutdown.
- Finally, raising the debt ceiling is a routine process that Congress has always done in the past. While there is always some political wrangling over the debt ceiling, ultimately, Congress will raise it.
Most political experts we follow expect the debt ceiling to be increased before the deadline date, making it 90 increases since 1959.
This is Washington after all and everyone has an agenda, but we don’t expect the current members of Congress will want to be blamed should the U.S. default on its debt, causing a major drop in the stock market and potential recession right ahead of an election year.
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and Flagship Financial Advisors are separate entities. This content is developed from sources believed to be providing accurate information and provided by Flagship Financial Advisors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice.