Published January 18th 2023

Daily Brief - US Debt ceiling - what is it?

TLDR: The strangest ritual in US politics, the government debt ceiling negotiation, is making its way back into the headlines. On Thursday, the US government will have reached the limit (“ceiling”) beyond which it is no longer allowed to borrow and will gradually - unless this limit is raised - run out of cash. The worst part? It is entirely self-inflicted. Let’s find out why.

debt ceiling meme

The Treasury has to pay the US government’s bills, and to do that it issues debt. Eventually the debt outstanding reaches some arbitrary number called the “debt ceiling.” Unless Congress raises the debt ceiling - remember, it’s arbitrary! - the US defaults on its obligations and market mayhem ensues. Well, ‘tis that season again.

Ok, but it is arbitrary and not tied to any economic fundamentals, this should be the easiest cross-party-lines vote ever.

Wrong.

Although Congress has raised this limit over 100 times in our nation’s history, it has been a time-honored tradition since 2011 for the opposition party to use available leverage to extract maximum political gain in exchange for NOT burning down America's financial house. Blackmail at its finest.

In the past, ignoring the drama around it (and assuming Washington would work it out eventually) would have served you well. This is likely the outcome this time, too. But there are a few points to consider that might raise the volatility and noise around the issue.

First, Republicans have claimed a razor-thin majority in the House, and the GOP caucus includes a significant fraction of "burn-it-all-down" policy nihilists.

At the same time, financial markets have become complacent about political risk because ignoring the noise has been the right strategy over the last 12 years. Even as Secretary Yellen announced the debt ceiling would be reached on Thursday, markets did no care much for the news.

To be sure, there is some time to address this. Even after it is no longer able to borrow money, the Treasury is able to use a variety of financial shenanigans - pardon, “extraordinary measures” - to keep the nation afloat. This time, likely until June.

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Daily Brief - US Debt ceiling - what is it?

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