Debt Ceiling Shutdown?
Yes, if the US Government decided to stop paying its debts entirely, the collateral damage for the capital markets and the world economy would be hard to quantify. But is that what “hitting the debt ceiling” means?
Way back in 1917, as part of the Second Liberty Bond Act, the US Congress agreed to put in place the debt ceiling mechanism. They were smart enough to know that left unchecked, people (especially politicians) will spend more than they should. And the debt ceiling was the tool which would force periodic reckonings……moments of clarity and sanity for the political spenders.
Fast forward about 100 years, and it seems that every once in while we see scary headlines about the debt ceiling. But it’s not the debt ceiling which is the problem. It is the excess spending by politicians which forces the US government budget to hit its head on the debt ceiling. Between now and June of this year, the US Government will have to reign itself in simply because the debt ceiling is forcing them to do so. Sort of like taking away the credit card from your teenager, while making them complete chores to earn $ to pay off the balance.
As investors, we have a long list of things to worry about which might impact the markets. And as a portfolio manager, I don’t invest a lot of time in worrying about the debt ceiling. The politicians will use it every so often to shill for each of their preferred pet projects, but the fact that the debt ceiling exists and periodically requires them to behave better means it is working.
The image below, courtesy of Morningstar, depicts the government shutdowns over the last 30 years and the corresponding returns in the S&P 500 stock index. The key takeaway is this: hitting the debt ceiling is an event which the markets can see coming in advance. That is likely why the markets have mostly fared well through both the actual shutdown phase, and even the longer crisis phase.
Author: Rick Wagner
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