Understanding the U.S. Debt Ceiling

As the U.S. debt ceiling comes into focus once again, many investors are understandably seeking clarity on what this could mean for their portfolios. To provide you with a better understanding of the issue, our blog this week gets into the history of the debt ceiling, including its use as a political tool between Democrats and Republicans. We will also examine the range of options available to the U.S. government as they navigate this issue, including the platinum coin option.

What is the debt ceiling?

The debt ceiling refers to the limit on the amount of debt the U.S. government can take on to fund its operations. This limit is set by Congress and periodically needs to be raised to avoid default on its financial obligations. This is a self-imposed limit which generally is increased without any issue.

A brief history of increasing the debt ceiling.

The U.S. government has raised the debt ceiling over 80 times since 1917, often with bipartisan support. The last time the debt ceiling was raised, Congress voted to increase it by $2.5 trillion, which President Biden signed into effect on December 16, 2021. At that point, it was set at about $31.4 trillion. However, in recent years, it has become increasingly politicized, with both Democrats and Republicans using it as a bargaining chip to achieve their policy goals.

Why is the debt ceiling used as a political tool?

Republicans often use the debt ceiling as leverage to demand spending cuts and reforms to entitlement programs and argue that getting rid of it could lead to even more reckless spending. Democrats on the other hand argue that raising or suspending the debt ceiling is necessary to fund their policy priorities, such as infrastructure investment and social programs. With the current political dysfunction in Congress, it could be more difficult to raise the debt ceiling in a timely manner, which could have serious consequences for the U.S. economy and the global financial system.

Options on how the U.S. government can navigate this issue.

The U.S. government has a few options to navigate the debt ceiling crisis, including:

• Raising or suspending the debt ceiling through legislation.

• Using extraordinary measures, such as delaying payments to government programs, to buy time until Congress can act.

• Minting a platinum coin with a face value of $1 trillion or more, and then depositing the coin at the Federal Reserve, which could be used to pay the government's bills without breaching the debt ceiling.

The platinum coin option is controversial and has never been used before, and its legality and practicality remain uncertain. Furthermore, the platinum coin option would not address the underlying issue of the debt ceiling and could potentially create new problems in the future if it were used to avoid difficult political decisions.

Why the U.S. government wouldn't risk the instability of its financial system.

The U.S. government is unlikely to let the debt ceiling crisis spiral out of control because it risks damaging the country's reputation and the stability of its financial system. From an investor's perspective, it is important to keep in mind that the U.S. government has a long history of managing its debt and financial obligations, and has always taken steps to avoid defaulting on its debts. While the debt limit is a serious issue, it is just one part of the broader landscape of U.S. government finance.

What investors can expect and why they should maintain a long-term outlook.

Investors should expect market volatility in the event that it takes longer for the US government to come to an agreement to increase the debt ceiling, but investors should maintain a long-term outlook. Historically, the stock market has recovered from these types of events very quickly. Investors who maintain a long-term perspective and remain focused on their investment goals have historically fared well, as the stock market has shown resilience in the face of temporary market volatility caused by debt ceiling crises.

Conversely, short-term investors who try to time market events like what we may experience (emphasis on may experience), often underperform the market and have lower long-term returns. Market timing is notoriously challenging, and attempting to predict short-term market movements can lead to missed opportunities and increased costs. The most successful investors don’t attempt to time short term events.

By considering the historical context and the U.S. government's track record in managing debt ceiling challenges, investors can navigate through the short-term uncertainty, remaining confident in the historical resilience of the stock market and the U.S. government's commitment to fulfilling its financial obligations. Taking a long-term approach and focusing on investment goals can help investors achieve more favorable outcomes and mitigate the risks associated with short-term market fluctuations.

- Grant White, CIM®,CFP®

Grant White is a Portfolio Manager / Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families. This information has been prepared by Grant White who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth.

The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trade mark and business name under which iA Private Wealth Inc. operates.

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