After months in and out of the headlines, the issues surrounding the debt ceiling have come into sharp focus, as the U.S. could become unable to pay its bills as soon as June 1. There’s nothing like an impending deadline to force action.
What is the debt ceiling?
The debt ceiling is the amount of money the U.S. is authorized to borrow to pay its bills. Since the U.S. runs a budget deficit, the government is forced to borrow to make up the difference. Since Congress has the “power of the purse,” it sets spending limits and must approve any increase.
Why is this an issue?
A debt ceiling “crisis” is nothing new. Historically, Congress has always suspended or raised the debt limit to ensure the U.S. avoided default. But as happens frequently with divided government, Washington D.C. is currently at an impasse. Republicans in the House passed a bill that would raise the debt limit in exchange for spending cuts. Democrats, on the other hand, are looking for a bill without conditions. A deal will need to be reached where both sides make concessions.
What if a deal is not reached?
The U.S. failing to pay its bills in full and on time would have serious economic repercussions. In theory, a default could result in delayed payments of federal benefits, job losses, higher borrowing costs as U.S. debt is downgraded, and a global recession. The ramifications would be hard-hitting and unprecedented, which is why it hasn’t happened before, and probably won’t this time.
Where do we stand now?
Stocks closed higher on Wednesday May 17, 2023 after President Biden expressed optimism about debt ceiling talks, and both he and Speaker McCarthy expressed confidence that a default will be avoided. The President will return early from a trip to the G7 Summit to continue negotiations on Sunday. This is a good sign that, despite the harsh rhetoric from both sides, a deal will get done.
We know the markets don’t like uncertainty, so getting the debt ceiling issues behind us will be one less thing for markets to worry about. As your financial professional team, we’re here to help handle whatever is thrown at you and keep you focused on your financial goals.