Perspectives on the U.S. Debt Ceiling
“[The debt limit debate]... just seems such a waste of time for a country that’s got a lot of things to do. I’d love to see them eliminate the idea, because it results in these periodic stalemate operations where everybody uses it for posturing purposes.”
May 2023
Key Takeaways
The debt ceiling has been raised 78 times since 1960.
It’s impossible to predict how the debt ceiling debate will be resolved or how it will impact investors.
A diversified mix of stock and bond investments are likely to be the best tools to ride out this period.
If the ongoing debate over the debt ceiling is giving you a dizzying sense of déjà vu, you are forgiven. The debt ceiling, or limit, is the amount of money the U.S. Congress has authorized the government to borrow, and Congress can authorize increases when the government nears or reaches the limit. Congress has acted to effectively raise the debt ceiling 78 times since 1960. Occasionally, like they are today, policymakers have struggled to reach consensus to authorize increases.
While debt ceiling debates can be nerve-racking, and some media outlets amplify the drama, the implications for investors are uncertain. Historically, Congress has always raised the debt limit, and even if Congress failed to increase the limit in time, it is not clear what that would mean in practical terms. A range of payments could be impacted, from salary payments to federal workers to interest and principal payments on federal debt. But trying to predict likely scenarios is difficult, given that markets have already priced in a range of outcomes.
Looking at past examples cannot tell us what will happen in the future, but it can provide an important reminder that trying to outguess the market is a fool’s errand. An investment approach that incorporates current price and yield information allows us to harness the market’s collective wisdom. This is why your portfolio includes small and large stocks, value and growth priced stocks, and stocks in U.S. and international markets. If you hold bond investments, then you own bonds with varying term and credit quality - another source of diversification.
Diversification over Debates
When we face uncertainty, diversification remains one of the most important risk management tools available to us. Although a U.S. government default likely would trigger reverberations throughout global markets, I believe a balanced asset allocation combined with a focused investment horizon are the best tools we can use to help ride out short-term uncertainty.