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What Is The Debt Ceiling? Thumbnail

What Is The Debt Ceiling?

Investing Retirement Funding Insights Federal Employees Financial Wellness

Unless you've been living in a cave for the last 500 days (Beatriz Flamini), you know our government is reaching the point where we can no longer pay our bills. The topic has dominated the news cycle for the last few weeks. However, I don't believe the major news networks have done a good job of stating clearly and concisely what the debt ceiling limit is, what it means, and how it might impact investors. 

The article below is courtesy of Capital Group, one of the world's largest investment management firms. It's an FAQ they recently produced on the debt ceiling and its history. 

What is the debit ceiling?

The debt limit, also known as the debt ceiling, is the total amount of money that the U.S. government is authorized to borrow to meet existing obligations. These include Social Security and Medicare benefits, military salaries and veterans’ benefits, debt interest, and tax refunds.

Why does the debt ceiling exist?

It is stated in the U.S. Constitution that Congress must authorize borrowing. The debt limit was first instituted in the early 20th century to keep the Treasury from having to ask permission each time it issued debt.

How close are we to hitting the ceiling?

The current debt limit of $31.4 trillion, set in December 2021, was passed in early 2023. At that point, the U.S. government was not able to issue any debt and has been relying on emergency funds to meet short-term obligations.

When will emergency funding run out?

It could be as early as June or sometime in August, according to Congressional budget forecasts.

When will the U.S. Treasury run out of money?

Sources: Capital Group, Congressional Budget Office (CBO), Office of Management and Budget (OMB), Piper Sandler. Cash balance figures reflect estimates from Piper Sandler based on debt forecasts from the CBO and OMB, respectively. Estimates assume extraordinary measures are fully deployed and that the Treasury will not allow cash balances below $25 billion. "X-dates" refer to the date on which the U.S. government will be unable to pay all its obligations. Cash balance path is smoothed. As of April 12, 2023.

How often has the debt ceiling been raised?

Congress has acted 78 times to "permanently raise, temporarily extend or revise the definition of the debt limit" since 1960, according to the Treasury Department. It has been raised 49 times under Republican presidents and 29 times under Democratic presidents, by Congressional leaders in both parties. 

Has Congress ever failed to increase the debt limit?

Despite many heated standoffs, Congress has always acted when called upon to raise the debt ceiling to meet the obligations of the U.S. government. 

What are the potential stakes of not raising the debt ceiling?

Not increasing the debt limit could mean the federal government has to default — even temporarily — on its obligations. Bond holders are paid first, while salaries for government employees are more likely to be delayed.

Sources: U.S. Treasury Department, WhiteHouse.gov, Committee for a Responsible Budget.

It goes without saying that a potential default is hugely concerning. I don't think anyone truly knows how this could impact the US's standing within the global community, nor what it would mean for everyday Americans. 

Nonetheless, it's worth keeping perspective on the history of the debt ceiling. As Capital Group points out, we've been here before and resolved the crisis before a default; markets have proved to be resilient at working through past debt limit standoffs, and lastly, if it's not the debt limit creating volatility in the market, it's something else - see Russia/Ukraine, Interest Rate Hikes in the US, Artificial Intelligence, Inflation, Covid...

Please know that we're here to help if you're concerned about the impact the debt ceiling standoff will have on your financial wellness. Connect with us online, call us at (252) 635-6666, or stop by the office in historic downtown New Bern, NC, to learn more. 

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