U.S. Debt Ceiling

Scott Simpson, CFP®

May 31, 2023

I am writing to you today to share some important updates on the current situation regarding the US debt ceiling and how it may affect your financial plans and goals.

As you may know, the US debt ceiling is the legal limit on how much the federal government can borrow to pay its bills, such as interest on the national debt, Social Security benefits, Medicare payments, and military salaries. The US debt ceiling was raised to $31.4 trillion on December 16, 2021. On January 19, 2023, the debt limit was reached, and the Treasury started using “extraordinary measures” to borrow more money without breaking the law. However, these extraordinary measures will not last forever and will run out soon. The Congressional Budget Office estimates that the government will run out of money between July and September 2023. The Bipartisan Policy Center predicts that the US will hit its debt limit as early as the summer or fall of 2023. If Congress does not act to raise or suspend the debt ceiling before then, the US government would not be able to pay all its bills, which could cause a lot of problems for the economy and the markets.

According to a report by the White House, a default could lead to a recession, higher interest rates, lower stock prices, less retirement savings, less trade with other countries, and a lower credit rating for the US. Luckily, there is some hope that a deal can be made to avoid this crisis. According to recent news reports, President Joe Biden and House Speaker Kevin McCarthy are close to a deal that would raise the debt ceiling for two years and limit spending on most things. The deal would also rescind some of the $80 billion that was allocated to the IRS last year to boost tax enforcement and revenue collection. The rescinded IRS money would then be used to cover much of the shortfall in domestic funding created by the spending cuts.

This deal could make both parties happy: Republicans could say that they cut spending for 2024, while Democrats could say they kept most of the things they care about at similar or slightly lower levels. However, the deal is not done yet and could face some challenges from some lawmakers who may not like it. Some Republicans may want more spending cuts or other changes in policy, while some Democrats may not want any cuts to the IRS or other things. Also, even if a deal is made, it may not pass until the last minute before the deadline, which could make the markets nervous and unstable. As one expert said: “A debt ceiling deal can only pass at the very last minute. That’s by design.”

So, what does this mean for you as an investor?

First, I want to let you know that I am watching the situation closely and will keep you updated on any changes that may affect your portfolio or financial plan.

Secondly, I want to remind you that market ups and downs are normal and expected, especially when there is political uncertainty. While news and events may influence your decisions, it is important to stay focused on your long-term goals and follow your investment plan.

Thirdly, I want to share with you some historical data that may give you some perspective and confidence. In 2011, we faced a similar debt ceiling crisis that was resolved at the last minute with a deal that raised the debt ceiling for two years and cut spending by $2.4 trillion. Although the markets were volatile and the US credit rating was downgraded by Standard & Poor’s, we did not default on our debt, and we did not go into a recession. In fact, the stock market recovered quickly and continued to grow for several years after that. This shows that we can survive a debt ceiling crisis and that this time may not be much different from a recovery standpoint.

I am available to answer questions you may have about your portfolio and ensure it is well-diversified, it matches your risk level and time frame, and that you are focused on your long-term financial plans and goals. Also, if you feel like it could help, taking a break from the news once in a while can give yourself a mental break as constantly hearing scary/unknown news can be overwhelming and exhausting.

As always, thank you for your trust and confidence in me as your financial advisor. I look forward to hearing from you soon.

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