What the Debt Ceiling?!?!
By Potentia Wealth
The media and political pundits have had a new focus to worry their American viewers: the debt ceiling. However alarming the headlines make it sound, this is not a new conversation. But first, a history.
Debt Ceiling: A Brief History
The debt ceiling is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. If the ceiling is not raised, the Treasury would not have authority to borrow any more money. And that can be a problem since the government borrows to make up the difference between what it spends and what it takes in. It uses that borrowed money to help fund operations and pay creditors.
This is not a new problem. Prior to 1917, Congress would authorize each bond issue by the United States Treasury individually. In the interest of efficiency, they created a debt ceiling which allowed the Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt fell under the statutory debt ceiling. Congress has raised the debt ceiling 14 times from 2001 to 2016. The debt ceiling was raised a total of 7 times (total increase of $5365bil) during Pres. Bush’s eight-year term and it was raised 11 times (as of 03/2015 a total increase of $6498bil) during Pres. Obama’s eight years in office.
It wasn’t until 1995 that the debt ceiling became a political lever in the battle between Democrats and Republicans. 1995 brought our first government shut down that lasted from November 14 through November 19, 1995, and from December 16, 1995, to January 6, 1996, for 5 and 21 days, respectively. The S&P 500 ended 1995 with a 34% return.
2011 brought our next debt-ceiling crisis which ultimately caused a credit downgrade and the DOW losing 2,000 points in late July and August. The Government Accountability Office (GAO) estimated that the delay in raising the debt ceiling raised borrowing costs for the government by $1.3 billion in 2011 and the Bipartisan Policy Center extended the GAO’s estimates and found that the delay raised borrowing costs by $18.9 billion over ten years.1 In 2011, the S&P 500 ended the year flat.
In 2013, Congress kicked the debt-ceiling can down the road for a number of months with the Treasury activating extraordinary measures to avoid a default. The crisis ended on October 17, 2013 after a 13 day shutdown with the passing of the Continuing Appropriations Act. The S&P 500 ended 2013 with a 30% return.
December 22, 2018 brought the longest shutdown in US history which lasted 35 days until January 25, 2019. The S&P 500 declined by 20% ending 2018 with a negative 6% return for the year and ended 2019 with a 29% return.
Where We Are Today
Debt ceiling clashes come at a cost, and they’ve accelerated since the 1990s, forcing the Treasury to employ “extraordinary measures” to avoid defaulting in 1995-96, 2002, 2003, 2011, 2013, 2014, 2015, 2017, 2019, and again in July, when the debt limit was reimposed after a bipartisan period of “suspension” agreed to under former President Donald Trump. The dirty secret about debt-ceiling brinkmanship is that it doesn’t do anything to reduce spending. The budget debate and approval comes first and is separate from the debt-ceiling approval process.
While this political gamesmanship threatens to shutdown the government and raise temporary havoc in the economy, it seems to have little long-term impact on the stock market. We believe we will almost certainly come to an agreement that will allow our country to continue to financially function.
Our economic outlook is still positive, and we expect our markets, while potentially volatile during this debt ceiling dilemma, to be positive as well. It is not the time to be moving to cash or taking drastic actions in our portfolios. We recommend staying the course until cooler heads prevail and expect the S&P 500 to end the year undaunted by the Federal Follies.
- “Debt Limit Analysis” (PDF). Bipartisan Policy Center. 27 November 2012. Retrieved 13 January 2013.