On March 15, the United States will once again come to a decision point – whether or not to increase the limit of its borrowing authority, or, as it’s more frequently called, raise the debt ceiling. This action does not authorize the government to spend more money, but simply confirms that we will pay our existing bills.
Budget battles and a slowmoving Congress have led us to this point, and much of the country waits with baited breath for what’s to come. How will President Trump and his advisors handle their first budget crisis? Will the “Trump effect” on the markets, which many believe caused their record-highs, continue regardless of the debt ceiling decision, or is a financial crisis on the horizon?
Back in 2011, the Treasury nearly defaulted on its debt for the first time in history, which caused Standard & Poor’s to bring the country’s credit rating down to AA from AAA. On New Year’s Day in 2013, a similar situation took place when Bush-era tax cuts expired and spending cuts collided on the same day. Since then, the debt ceiling has passed silently twice, suspending the limits each time, with the latest suspension expiring this month. With nearly $20 trillion in debt, the new administration has several decisions to make regarding not only the debt ceiling, but also regarding spending and budgeting.
If the government fails to come to an agreement on the debt ceiling, the Treasury has multiple means that can be used to pay our bills prior to reaching “X” date – the final day prior to exhausting all means. However, the debt ceiling is the largest layer of defense we have against defaulting on our financial obligations. Furthermore, none of this comes without cost. According to the Government Accountability Office, the very threat of an agreement not being reached to raise the debt ceiling cost taxpayers $1.3 billion in higher borrowing costs in 2011, and tens of millions of dollars in 2013. This information is daunting and overwhelming to say the least. And it’s everywhere.
It’s natural for you to feel nervous about what may come, especially with a new president at the helm. At McCabe & Associates, one of our jobs is to block out the white noise and help you remain focused on your long-term goals regardless of what the media is reporting or what is happening in the government or financial sector.
So here’s what we know:
- Reaching the debt ceiling is a big deal. We have to acknowledge that. If the government does not make a decision in time and the country reaches X date, global markets will likely see volatility, and interest rates will likely soar. The country’s credit would be marred, and the domestic economy would struggle.
- There is no shortage of urgency in tackling this issue. As far as we know, no one in this country wants the United States to default on its financial obligations or receive a credit downgrade.
- The new administration has an opportunity to prove to all U.S. citizens that it can handle any crisis that arises. Given the current state of public opinion, this opportunity is one they are likely aware they should not bungle.
- We’ve approached the debt ceiling before and made it through. While it took until the 11th hour a couple of times, all involved parties were able to come to an agreement that kept the country solvent.
- As has been said before, “There are no facts about the future, just opinions.” Don’t take anything you read or hear as a certainty of what’s to come. While the process of defaulting is set, whether or not the country WILL default is entirely undecided at this point.
While many feel powerless, we do live in a democracy, and your elected officials were put in office to represent you and be your voice. If you have an opinion you’d like to share, we urge you to contact your congressional representatives. If you have questions or concerns regarding the debt ceiling, your portfolio, or just want to have a conversation about the current climate, please feel free to contact us. We’re here to help.