On the contrary, raising the debt ceiling simply allows the U.S. Treasury to borrow in order to pay existing<\/em> obligations. Thinking of it a different way, it would be similar to making the decision to buy a car, signing a contract to finance the purchase, and then debating several months later whether or not you should make the monthly payments. Other than Denmark\u2014where the debt ceiling matter has yet to become a political flashpoint\u2014no other developed country operates this way.<\/p>\n\n\n\n There is a perfectly fine and fair argument that the U.S. should have never \u201cbought the car\u201d in the first place, i.e., that there\u2019s been too much borrowing and spending on programs and entitlements in recent decades. With both parties responsible for big spending programs and deficits over this period, these are conversations worth having. But the debt limit is not the arena for it \u2013 instead, lawmakers should bring the debate to the federal budget, when tax and spending levels are determined.<\/p>\n\n\n\n Regardless, in this latest installment of the debt ceiling issue, the Treasury Department has warned that the U.S. could begin missing payments as early as June 1st. Other forecasts suggest the U.S. government may have until early August. It is unclear which payments would go unpaid first, but there\u2019s a strong indication that the Treasury could prioritize debt payments over obligations like government wages, VA benefits, Social Security, and the host of other payments owed \u2013 akin to a government shutdown, which has happened before.<\/p>\n\n\n\n Being late on\u2014or missing\u2014a Social Security payment or a child tax credit payment is not good, but it is also not the same thing as missing a principal payment and\/or interest payment on a Treasury bond. The former is an unfortunate lapse in a government entitlement program; the latter is \u201cdefault\u201d in the true sense of the word.<\/p>\n\n\n\n I do not think the issue of missing a debt payment is on the table for this summer, despite media reports to the contrary. For bond principal payments that come due, the U.S. Treasury is authorized to issue new debt to refinance a maturing bond\u2014no Congressional approval needed. For interest payments, the Treasury can almost certainly prioritize these payments over the obligations described above, and they\u2019d have plenty of cash available to do so. As seen below, current tax receipts (blue bars) are far higher than debt interest payments due (red bars), so technically speaking the Treasury could stay current on debt payments without a debt ceiling increase:<\/p>\n\n\n\n Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/p>\n\n\n\n No one can predict how the current drama will unfold. Failure to pay obligations in relation to government shutdowns has historically contributed to short-term volatility for equity markets. The 2011 \u201cfiscal cliff\u201d scare dragged on for long enough that Standard & Poor\u2019s lowered the U.S.\u2019s credit rating from AAA to AA. According to the Government Accountability Office, the lowered credit rating cost the U.S. about $1.3 billion for that fiscal year, which is small but still represents an avoidable cost. The stock market also endured a real correction in 2011, falling some -19% from the intra-year peak (though it ultimately finished flat for the calendar year and rose +13% in 2012). <\/p>\n\n\n\n In 2013, the standoff led to a U.S. government shutdown that lasted 16 days (from October 1 to October 17). In that instance, the stock market response was far more muted. The S&P 500 pulled back slightly during the shutdown (chart below), but did not waver from its overall upward trend for the year. The index finished up +30%.<\/p>\n\n\n\n Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/p>\n\n\n\n Bottom Line for Investors<\/strong><\/p>\n\n\n\n We should reasonably expect short-term volatility the longer the debt ceiling debate drags on, but I would stop short of worrying about the possibility of dire economic and financial market outcomes \u2013 which are almost always overstated. In all \u2018down-to-the-wire\u2019 government funding situations in recent years, 11th<\/sup> hour deals have always found a way to get done.<\/p>\n\n\n\n I would agree that politics has gotten uglier and more hostile over the years, but I do not foresee a scenario where the U.S. government would be allowed to default on its debt. Such an outcome benefits no one, and it would only serve to disrupt financial markets and raise borrowing costs \u2013 an outcome neither political party wants. History shows a willingness to bring the U.S. economy to the brink \u2013 which is unfortunate \u2013 but never over the edge. The debt ceiling has been modified over 100 times since World War II, and it will be raised again.<\/p>\n","protected":false},"excerpt":{"rendered":" Once again, we face a political showdown concerning the debt ceiling. Mitch offers his insights on what could happen next.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9463","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9463","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9463"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9463\/revisions"}],"predecessor-version":[{"id":9467,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9463\/revisions\/9467"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9463"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9463"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9463"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/zacksim.com\/financial-professionals-insights\/wp-content\/uploads\/2023\/05\/pic1-2-1024x350.png\")
<\/figure>\n\n\n\n![\"\"](\"https:\/\/zacksim.com\/financial-professionals-insights\/wp-content\/uploads\/2023\/05\/pic2-1-1024x395.png\")
<\/figure>\n\n\n\n