Market Note SPECIAL EDITION: The Debt Ceiling

By Hightower St. Louis on January 20, 2023

Week of January 20, 2023

Click Here For Printable Version

What is the Debt Ceiling?

The debt ceiling is the maximum amount the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on national debt, tax refunds and other payments.¹ Lawmakers must raise or suspend the ceiling before the Treasury Department can issue more debt. The debt ceiling does not authorize new spending, but rather, allows the Treasury to pay for expenses the government has already authorized.

The worst-case scenario in which the debt ceiling is not raised would cause the government to default on its legal obligations – which is unprecedented in American history – and cause various other negative contagions across the economy. While the worst-case scenario is dire, Congress has always raised the debt ceiling when called upon and has acted 78 separate times since 1960 to extend or revise the definition of the debt limit; we view the chance that the debt ceiling is not raised as extremely unlikely.

Implications of Default

If the debt ceiling is not raised, the government would not be able to borrow to pay bills; it would have to suspend pension payments, withhold or cut the pay of soldiers and federal workers, and/or delay interest payments which would constitute a default. A default would, at the very least, rattle investor confidence in the security of U.S. Treasuries, which would likely cause a massive selloff in those securities and create an extremely volatile market. Rating agencies would also cut the U.S. credit ratings multiple notches; for example, S&P cut the U.S. credit rating from AAA after it came within days of breaching obligations, so an actual default would cause multi-notch downgrades.

The US has defaulted on its debt just once before, in 1979; this was a technical bookkeeping glitch that resulted in delayed bond payments but was quickly rectified. The U.S. has never intentionally defaulted on its debt.

Likelihood of Default

The most recent debt-ceiling debate was resolved in 2021 when a deal allowed the ceiling to be raised with a simple majority vote in the Senate instead of the typical 60 votes required. The situation is more complicated this time around as the Democrats do not control both houses, and the more outspoken Republicans in the House have spurned political norms (see Kevin McCarthy 15x vote for Speaker of the House).

The Treasury has some temporary options to pay bills; it can use cash on hand, spend incoming revenues (i.e., tax revenues), or use some “extraordinary measures.” These measures include a redemption or suspension of investments in certain federal retirement and disability funds, which would be made whole at a later date.²

Another scenario for staving off a default would be one California encountered around 10 years ago. The state issued IOU’s in lieu of payments for a stretch of time and all debts were eventually repaid. As unlikely a scenario as it is, if the debt ceiling is not raised in time, we do not think the U.S. Government will stop paying Treasury debt first.

At the end of the day, we view the chance of a default as minuscule, but understand the far-reaching implications should it not be raised. This is a chance for some outspoken members of Congress to make their views heard about concerns related to the level of debt. At the end of the day, it would be politically detrimental to allow the U.S. Government to default, therefore, in no one’s best interest.

SOURCES
¹ Source: U.S. Treasury Department. As of January 19, 2023.
² Source: CNBC. As of January 19, 2023.

Click Here For Printable Version

Disclosure
Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.