Debt Disaster – The US Debt Ceiling
Once again, the US has become victim to partisan politics in what is a nasty situation for both the government and the economy. As warned by Treasury Secretary Janet Yellen and other economists a few weeks back, the US would reach the debt limit on January 19th. Yesterday went by, and no action was taken, forcing the Treasury to take “extraordinary measures” to give the US a bit more flexibility as the limit isn’t a hard stop. In order to keep paying bills, the Treasury has suspended investments for government accounts along with other measures, keeping the government afloat for another 5 months.
This gives the government 5 months to get their act together to prevent the US from possibly defaulting on their debt. Unfortunately, there are a massive number of political ties that could stall this process until the last minute. In House Speaker Kevin McCarthy’s election process, he was forced to make countless concessions to his fellow Republicans to gain their votes, and 2 of them stand out in this situation. First is McCarthy’s promise to force Democrats to cut spending in order to raise the debt limit, which is a difference in political ideology between the two parties. Second is the ability for one Republican to bring a “motion to vacate” against McCarthy, which essentially forces him to keep the first promise as he can’t risk fighting opposed members of his party. The Democrats, however, are opposed to spending cuts for obvious reasons, while also pointing to the past where debt ceiling negotiations have been made without a cut in spending for programs. If a default were to occur, we’d see the US credit rating take a hit and the global economy in shock. Defaulting is still very unlikely, which is why investors haven’t put much thought into it, but things can get spooky if a deal comes down to the last minute.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
