Addressing Concerns about the Debt Ceiling
Author: Jonathan Harrington
As we head into the Memorial Day weekend, Congress and President Biden have not yet reached an agreement to prevent a crisis that could occur if the debt ceiling is not raised by early June.
The debt ceiling is the maximum amount of money the U.S. Treasury is permitted to borrow to pay for U.S. government obligations such as Medicare, Medicaid, Social Security, military spending, interest payments, and tax refunds. An increase of this limit is not an authorization of new spending; rather, it gives the government the ability to fulfill already existing legal obligations by issuing new debt such as Treasury bills, bonds, and notes.
Once the debt limit has been reached, the U.S. government can no longer borrow to satisfy existing obligations. Although incoming tax revenue can help pay the bills, it will not be enough on its own, in which case some obligation payments would have to stop.
This crisis can be solved in one of two ways. The current debt ceiling of $31.4 trillion can be temporarily suspended, giving Congress and President Biden more time to work out their differences. Or the debt ceiling can be raised permanently to a level that allows the U.S. government to borrow to meet its existing obligations.
We’ve experienced similar situations with the debt ceiling many times in the past, most recently in 2021. Congress has moved to increase or suspend the debt limit 78 times since 1960 according to the Treasury Department.
Although there is a lot of political drama playing out in the press, we are confident that a resolution (whether temporary or permanent) will be reached prior to the time in early June when it is expected that the U.S. government would face a shortage of funds available to make payments on all its obligations.
Between now and when an agreement is reached, we expect increased volatility in the markets as happened in 2011 and 2013, when we experienced similar circumstances with the debt ceiling.
Money Market Funds
During this period of uncertainty, investors in money market funds have questions about risks stemming from the Treasury securities that would be affected if the debt ceiling is fully reached and the U.S. cannot make interest or principal payments on Treasury securities.
Money market funds at Fidelity are being managed to maintain high liquidity and are being positioned conservatively to account for the risks associated with the U.S. government reaching the debt ceiling. See the attached commentary from Fidelity, which goes into detail about the U.S. government debt ceiling and its relationship to Fidelity money market funds.
It is important to remember that the U.S. government has never failed to make interest payments and that it is in the government’s best interest to continue to maintain the faith and confidence that the world has in U.S. government securities.
Disclaimer/Author(s) Bio: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Jonathan Harrington, CFP®, MSFP, MST is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.