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US Debt Ceiling Drama Déjà Vu

The headwinds that buttressed the market and the economy last year are still with us…high inflation; an aggressive Fed and an unsettled geo-political construct. To that list we can add the risk of the US government defaulting on its financial obligations; more specifically, and more importantly from a macroeconomic perspective, the risk that the US will miss interest and/or principal payments on its bills, notes, and bonds (said differently, the US would default on its debt). We have arrived at this moment as our government hit its self-imposed debt ceiling of $31.4 trillion on January 19th (which means the government cannot raise new funds by issuing new debentures). This is a big problem as our government spends much more than it takes in from tax revenues and other sources of income.

From a practical point of view, the government is not at risk of running out of funds immediately – according to the Treasury Department the government has the funds to meet its financial obligations into June; past that point, the government will still have incoming tax revenues that would enable it to meet some but not all its obligations (e.g., the government could make principal and interest payments on outstanding debt but skip payments into Federal retirement funds). Of course, were Congress to raise, suspend or eliminate the debt ceiling the government could sell the bonds necessary to fund its previously agreed-to spending and financing obligations. But, given the state of our country’s political discourse, many on Wall Street are doubtful Republicans and Democrats will reach a deal on the debt ceiling.

Our political crystal ball is as fuzzy as any, but we are optimistic a deal that ties cuts or caps in spending to a raising of the debt ceiling will get done (for no other reason than the economic and political risks of not doing a deal are too great). And it is worth noting that since 1960 Congress has raised the debt ceiling 78 times and we have lived through prior periods of debt ceiling drama, including in 2011, when Standard & Poor’s downgraded the US credit rating due to Congress’s inability to get a debt ceiling deal done. Well, that deal did get done and US interest rates, which should have moved higher on the downgrade, moved lower (see chart).

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 190-BCI-1/23/2023

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