Floored By The Debt Ceiling | Scrappy Calls Bull!

The “Bull”

The United States of America is one of two Western countries with a self-imposed debt limit (Denmark is the other one). Established by the Second Liberty Bond Act of 1917^[1], the U.S. Congress is obligated to do one of the following:

1) Pass a national spending budget that conforms to a previously set limit.
2) Amend the budget to match a newly set limit (the road of bipartisan compromise).

If Congress ever failed to raise the debt ceiling and declined to pay its bills, the result would be an economically harmful credit default that could roil markets and economies around the world.

For those investors who watched cable news through the last week of May, it seemed the proverbial end was nigh…for their financial assets.

Some media outlets reported that we were in imminent danger of an economic “recession” ^[2] or an U.S. credit downgrade ^[3] or a sudden halt to social security checks and payments to federal workers. ^[4]

The Reality

On June 3, 2023, a bill was signed into law to raise the debt ceiling^[5]. The United States didn’t default on its debts. Social Security checks are still being paid out. Federal workers haven’t been denied their salaries or wages. The so-called “debt ceiling crisis” was in fact…not a real crisis.

The Point

Historically, the United States has never failed to pass the debt ceiling^[6]. The Federal Government has never chosen to simply walk away from its bills or loans. Before any of the parties involved began to argue a single provision, they plainly established their desire to avoid a credit default.

The United States currently holds a position as the world’s top consumer market^[7]. If we did default on our debts, the knock-on effects on the global economy could be unprecedented. This outcome wouldn’t be in the interest of the country, nor the elected politicians who represent it.

A credit default was unlikely from the outset (especially when history is considered). Regardless, mainstream news media outlets such as CNBC, ABC News, CBS News, and CNN aired news stories that projected a grim outcome to budget negotiations. For some investors, fears of market volatility may have overwhelmed their good sense and (potentially) fueled speculation.

Wildly underestimating the political desire for market stability, might make for exciting television, but it is just one more example of why investors should be wary of the media’s stock market and economic predictions.

Ignore the “bull”. Trust the evidence.

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[1] Smith, T. June 2, 2023. U.S. debt ceiling: Definition, history, Pros, Cons, clashes. Investopedia. https://www.investopedia.com/terms/d/debt-ceiling.asp
[2] Where debt ceiling stands after third Biden, McCarthy meeting. May 22, 2023. CBS News. https://youtu.be/wWzqinvMn5c
[3] CNBC Television. PIMCO’s Libby Cantrill. May 23, 2023.Expect a short-term debt ceiling increase if no deal in next 48 to 72 hours https://youtu.be/--sPqtS0kEA
[4] ABC News. May 22, 2023. Stock market reacts to debt ceiling showdown. https://youtu.be/gY0OdsbVZRI
[5] CBS Evening News. June 3, 2023. Biden signs deal to lift debt ceiling, avoid default. https://youtu.be/0iXO-LkqzFc
[6] Economy & Trade. United States Trade Representative. https://ustr.gov/issue-areas/economy-trade
[7] Council on Foreign Relations. May 25, 2023. What happens when the U.S. hits its debt ceiling? https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling

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