In the world of fiscal policy resides a precarious tightrope that the United States government finds itself navigating time and time again. A balancing act between fiscal responsibility and economic growth, the debt ceiling hinges on the relationship between government spending and debt accumulation.
Recently, the U.S. debt ceiling has once again found its way into the headlines of economic news. Before you jump to any rash conclusions about the future of the debt ceiling and U.S. economy, it is crucial to have a well-rounded understanding of the history, mechanism, and future possibilities an approach to the debt ceiling may have.
The quick answer to your concerns is that it is not likely a debt ceiling event will have long term effects on the economy and market. However, let’s take a look at some of the reasons this is the case.
The Inception of the U.S. Debt Ceiling
The U.S. debt ceiling can be traced back to the Second Liberty Bond Act of 1917. This legislation was put into play to help finance U.S. involvement in World War 1. During that time in 1917, the United States Congress strived to establish an aggregate limit on the government’s ability to borrow funds.
The main goal of the debt ceiling at the time was to establish more control over public debt. Since 1917, the U.S. debt ceiling has experienced a variety of increases, suspensions, and modifications by Congress to fit the financial needs of the country. In more recent memory, however, the debt ceiling has notably been increasing.
Since 1960, the debt ceiling has been raised 78 times. The debt ceiling plays a pivotal role in the United States’ financial landscape. Action taken on the debt ceiling has aided the U.S. government in addressing and overcoming various economic challenges in the past.
On many occasions where the debt ceiling is modified, intense debates, negotiations, and backlash have risen, highlighting both the nuance and the consequences of managing U.S. national debt.
Notable Debt Ceiling Events
Studying key events surrounding debt ceiling modification in the past can provide valuable insights into the economy’s response to future action. The U.S. is no stranger to economic volatility.
In some cases, the debt ceiling played a major role in the prevention of a default on national debt. Here are some of the most notorious financial crises in the U.S. and the debt ceiling’s involvement in avoiding complete economic collapse.
The 1953 Debt Ceiling Crisis
During the presidency of Dwight Eisenhower, the 1953 debt ceiling crisis sparked major debate between political parties. President Eisenhower requested the debt limit be increased to fund the Korean War. Initially rejecting this impasse, Congress later approved a temporary increase in the debt ceiling.
The 1995-1996 Debt Ceiling Crisis
Much of the backlash surrounding a modification of the debt ceiling sparks between political parties. During 1995 and 1996, Democratic president Bill Clinton and the Republican-led Congress debated the debt ceiling due to differing budgeting priorities. The debate caused two government shutdowns, but ultimately led to the debt ceiling being raised and the two parties agreeing on a new budget.
The 2011 Debt Ceiling Crisis
In recent history, the most notable crisis rose from a familiar clash between the Republican and Democratic parties. Disagreements between the Democratic president Barack Obama and the Republican dominated Congress during the 2008 financial crisis allowed the country to inch closer and closer to defaulting on its debts. Luckily, however, a deal was reached to raise the debt ceiling and implement governmental spending cuts.
Recent Challenges of the US Debt Ceiling
U.S. debt ceiling negotiations have become increasingly convoluted in recent years. Political divisions and ideological differences have clouded the efforts to reach a timely and accommodating agreement.
As time passes, the risk of a potential default exists. Uncertainty and doubts on the stability of the U.S. financial system are created by the looming threat of default. The short-term nature of debt ceiling nature piles on more complexity to long term fiscal planning.
Government actions of the past surrounding default and the debt ceiling can provide both valuable insight into future fiscal response as well as peace of mind for investors understanding that the impact is typically limited to the short term.
Reasons not to Fear Conflict Surrounding the Debt Ceiling
Even under the pressure of a default on debt obligations, the U.S. government has consistently utilized the debt ceiling to resolve budgetary and economic conflicts. Although volatility is imminent during a financial crisis, the U.S. economy has remained steadfast in the long term.
Based on its response to past debt ceiling impasse events we can identify a few key reasons not to worry about long term losses from a modification of the U.S. debt ceiling.
Historical Precedent
In the past many investors have shared worries you may have right now. The U.S. government has always identified paths to resolve debt ceiling events to prevent default. Although politics can spur uncertainty in investors in the short term, the long-term resilience of the U.S. economy and financial sector does not tend to waver in these events.
Global Confidence
The U.S. dollar is the world’s reserve currency. U.S. Treasury bonds are considered one of the safest investments in the country and the world alike.1 With this type of global confidence, the U.S. government can continue borrowing and reduce the risk of a debt crisis.
Structural Flexibility
Even in a financial crisis the U.S. government has access to a variety of tools to manage U.S. national debt obligations. Some of these financial tools include prioritizing payments, roll over debt, and emergency measures that can be used to extend borrowing capacity for a specified duration.
Additional Resources
Whether you are concerned about market volatility, or you just want a second opinion on your financial strategy, reaching out to trusted financial advisors is never a bad option. Fragasso Financial Advisors has been expertly serving their customers for decades. To learn more about what Fragasso can do for you, or to learn more about the nuance of the debt ceiling, visit their blog today.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.
