Mom and Dad are fighting again. Sorry, the President and Congressional leaders are fighting again. This time it’s about the debt ceiling.
Before we get too far into their argument, let’s remember what the debt ceiling is. It is a self-imposed statutory limit on the amount of debt that the US Treasury can issue to the public or other federal agencies.
In simple terms, it is the credit limit for the US Government
On January 19, 2023, the limit was reached. At that time, the Treasury announced a “debt issuance suspension period” during which it can take “extraordinary measures” to borrow money without breaching the debt ceiling.
Since that time, the Treasury has been doing what it can to extend the time before the US Government really and truly runs out of money – this is called the X-date (not to be confused with a Marvel movie).
Effectively when this date is reached (and no one knows exactly when – although it is expected to be sometime between early June and August), the United States government will have exhausted its ability to borrow money and will have run out of cash to meet all of the financial obligations.
Not only does no one know exactly when the X-date is, no one can predict how the Treasury will operate when X-date happens.
This would be unprecedented.
Back in 2011 when the US government faced this situation, a deal was reached at the last minute to prevent it. The Treasury had a contingency plan in place for 2011, and it is likely that they would pull that plan off the shelf.
Under that plan, the Treasury would prioritize payments. This means they would continue to pay interest on government bonds as it comes due. As bonds mature, Treasury would pay off the bonds by auctioning new ones for the exact same amount. This would not increase the amount of money being borrowed, but it would allow for a functioning treasury market. It also “technically” avoids a default of US government bonds, but a default of payments due is still a default.
This is because, beyond the bonds that are due interest or are maturing, the Treasury would have to delay payments to Social Security beneficiaries, Medicare providers, agencies, and contractors until it had enough cash to pay for a full day’s bills.
And while the source of money for paychecks would be uncertain, Federal employees would probably still be expected to work as Congress has provided federal agencies the ability to obligate funds.
You can imagine that if Treasury is writing checks for interest and principal payments, but delaying Social Security benefits and federal paychecks, there are going to be some legal challenges. I mean, who appointed Treasury as the arbiter of who gets paid first when there isn’t enough to go around?
There are plenty of doomsday stories about what might happen if we blow past X-date, and if you want to read them, you can find them with a quick Google search. I won’t entertain that type of catastrophizing.
Senator Kevin Keeley: I don’t really drink…
Agador: Yeah, but now’s the time to pretend!
The debt limit was intended to signal that politicians have some level of fiscal restraint. The above chart shows that if it was ever true, we’ve long since reached the point that we can stop pretending.
Let’s remember that each time this completely made-up limit that has been reached, breached, or suspended it was raised. That means that 100% of the time we faced this exact crisis, the debt limit was raised.
A record of 100% suggests that this limit will probably be raised again[i].
If you are worried about how this manufactured crisis might impact you, let’s get back to personal. Sit down with a qualified, experienced, and licensed financial planner who can help you navigate this situation and any others that you may face in the future. Having a plan will help you avoid the doom loop of what-if thinking. You’ve got this! And, if you don’t have a financial planner, I’d be happy to help.
Anderson Wozny and Wozny Capital Advisors, LLC are not affiliated with or endorsed by the US Treasury or any other government agency. The information presented is believed to be from reliable sources, but no responsibility is accepted for any inaccuracies.
[i] Past performance is no indication of future performance; even and especially when it comes to political decisions.