WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
ARCHIVE: January 17, 2023
The Debt Ceiling: And So It Begins
Just like a bad penny, the debt ceiling saga continues to turn up and won’t go away. Treasury Secretary Janet Yellen last week gave notice that the debt limit for U.S. government securities is projected to be reached on January 19, though the consensus is that the saga could reach its most dangerous stages sometime around summer.
Sure, this topic generates a lot of headlines, but just what are we talking about here? The debt ceiling, also known as the debt limit, is the total amount of money the U.S. government is allowed to borrow to meet its existing legal obligations. According to the Treasury Department, Congress has acted 78 times since 1960 to either permanently raise, temporarily extend or revise the definition of the debt limit. For the record, adjustments have been made 49 times and 29 times under Republican and Democratic presidents, respectively. The current debt ceiling stands at $31.4 trillion.
Perhaps the most noteworthy episode in the recurring debt ceiling saga, and arguably the most infamous, occurred in 2011. Recall that era, when partisan politics was on full display as President Obama and the House Republicans were each vying to hold sway. But a budget impasse ensued, with the debt ceiling playing the role of the hostage. Ultimately, the two aisles came together and produced the Budget Control Act (BCA) of 2011. That not only dealt with budgetary issues but also ended up increasing the debt limit in three steps, by $2.1 trillion to $16.4 trillion. Interestingly, the debt limit is now almost double this amount.
However, the BCA was too little, too late; Standard & Poor’s still decided to downgrade the U.S. credit rating from AAA to AA+ on August 5, 2011, only days after the legislation was signed into law. The move reflected S&P’s opinion at the time that the BCA “falls short of what…would be necessary to stabilize the government’s medium-term debt dynamics.” In addition, it also stated that “political brinksmanship” was causing “America’s governance and policymaking (to become) less stable, less effective and less predictable.”
Amazingly, we are now back to square one. Secretary Yellen noted that the typical “extraordinary measures” that have been utilized in the past will be used, once again, to push out the deadline date. At some point, the Treasury’s money-moving machinations become exhausted, forcing Congressional action. Based upon current estimates, this could give the Treasury until summer.
So, with the shot clock now ticking, the political jockeying will commence in earnest. You could certainly make the argument that the environment in Washington, D.C., is about as politically charged as we have seen in our lifetimes. While our base case is that a downgrade or default will not be the final outcome, it will make for heightened headline risks over the next few months.
What if Congress and the Biden Administration can’t come to an agreement? Interestingly, during the 2011 episode, the Treasury and the Fed produced a plan of sorts in case the debt ceiling was not raised in time. With respect to the financial markets, the most important part of this plan stated that principal and interest on Treasuries would be made on time. For maturing principal, the Treasury would have “auctions that would roll over those maturing securities into new issues.” For timely interest payments, it would be “holding back other government payments” and use accumulated “sufficient cash balances in its Fed account.” Needless to say, “prioritization” is a politically charged concept, as it means the risk of payment delays and/or partial payments for other government obligations.
Unfortunately, we’re at the stage where this issue is just beginning to percolate, not only in D.C. but for the markets as well.
For more information, contact your WisdomTree representative or visit WisdomTree.com.
To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com to view or download a prospectus online. Read the prospectus carefully before you invest. Past performance does not guarantee future results. Important Risk Information:
There are risks associated with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country and/or sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks. This material contains the opinions of the authors, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Kevin Flanagan and Jeff Weniger are Registered Representatives of Foreside Fund Services, LLC. WisdomTree Funds are distributed by Foreside Fund Services, LLC.