The debt ceiling is a statutory limit on the amount of debt that the U.S. government can issue. If the government hits the debt ceiling, it cannot issue new debt to meet its obligations. However, this does not necessarily mean that the U.S. will default on its debt.
The Treasury Department has several tools at its disposal to manage cash flow in the event of hitting the debt ceiling. It can prioritize payments to ensure that interest on the debt is paid, as well as payments to other critical obligations such as Social Security, Medicare, and national security. However, this would mean that other government programs and services would have to be delayed or suspended until the debt ceiling is raised.
Defaulting on the debt, on the other hand, would mean that the U.S. government has failed to meet its obligations to repay its debts. This would have severe consequences, including a downgrade of the country’s credit rating, higher borrowing costs, and a loss of confidence in the government’s ability to manage its finances. It is important for the government to avoid defaulting on its debt at all costs.
If the U.S. were to hit the debt ceiling and be forced to prioritize payments, it would create a significant level of uncertainty and unpredictability in financial markets. This could lead to higher borrowing costs, as investors demand higher yields to compensate for the increased risk of default or delayed payments. In turn, this could reduce business investment and consumer spending, which would have a negative impact on economic growth.
Furthermore, delayed payments to federal workers and contractors could cause serious financial hardship for those individuals and their families, which could further harm the economy. In addition, it could damage the government’s reputation and credibility, which could have longer-term effects on the country’s ability to borrow money and manage its finances.
The United States has never defaulted on its debt obligations, and it is considered highly unlikely that it will do so in the near future. The government has always paid interest and principal on its debt, even during times of economic turmoil, such as the Great Depression and the 2008 financial crisis. The last time we had a similar debacle was 2011 and the outcome was pretty extreme volatility amongst various asset classes returns.
With all the craziness in Washington these days, I believe it’s important to monitor this situation. If it plays out as it did in 2011, defensive strategies (gold, utilities, healthcare, consumer staples, etc.) provided a good place to shelter from the storm and that is how we are currently positioned in our managed portfolios due in part to the existing macroeconomic and fundamental backdrop. It’s important to remember that fear drives attention, and attention drives media advertising revenues… So, try not to get too caught up in the daily noise. We will continue to keep a close eye on this situation, but I do believe that in the end, our politicians will reach a deal.
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Important Disclosures: Past performance is not a guarantee of future results. The statements contained herein are solely based upon the opinions of Edward J. Sabo and the data available at the time of publication of this report, and there is no assurance that any predicted or implied results will actually occur. Information was obtained from third-party sources, which are believed to be reliable, but are not guaranteed as to their accuracy or completeness.