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 โextraordinary measuresโ to give the US a bit more flexibility as the limit isnโt 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 McCarthyโs 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 McCarthyโs 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 โmotion to vacateโ against McCarthy, which essentially forces him to keep the first promise as he canโt 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, weโd see the US credit rating take a hit and the global economy in shock. Defaulting is still very unlikely, which is why investors havenโt 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.