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U.S. Budget Deficit
January 17, 2023

Why Will The Debt Ceiling Drama Actually Be A Real Problem This Time?

“Analysts are warning investors to brace themselves for the 118th Congress’ impending debt ceiling drama. It could actually be real this time, if the dysfunctional election of House Speaker Kevin McCarthy is any indication.

“The debt limit is going to be a problem,” Goldman Sachs told clients in a report on Monday. “Fiscal deadlines will pose a greater risk this year than they have for a decade.”

The debt limit, or the debt ceiling, is the maximum amount that the federal government can borrow by issuing bonds to pay off its financial obligations. Borrowing money — and lots of it — is how the US, which runs budget deficits, pays for its bills. Raising the debt ceiling does not mean it will be allowed to increase or make any new spending, all it does is allow the federal government to finance the debts it already has.

A failure on the part of the government to raise the ceiling on time would mean that the US would default on its debt. So, like some Washington ritual, raising the debt ceiling has time and again been used, usually between the White House and Congress, as leverage to push budgetary agenda.

But, the US has never defaulted on its debt. The government came close to it in 2011 when House Republicans and then-President Barack Obama engaged in a standoff. It was close, but it was resolved just in time to steer clear of the ceiling. And yet, it sent markets reeling, and S&P downgraded the country’s long-term credit rating from a perfect AAA — its rating for seven decades — to AA+. And it took about half a year for the markets to recover.

The US has never defaulted on its debt because neither side has ever really wanted to risk default. So much so that the markets have grown to ignore the periodic Washington drama. Until now maybe, with the House’s volatile majority, and with the many concessions Speaker McCarthy has had to give to take his turn with the gavel.

“We appreciate that the market has become numb to warnings of debt ceiling defaults because both parties have crept up to the brink without a material default,” Cowen Washington Research Group’s Jaret Seiberg wrote in a note to clients on Monday. “This time is different. In prior fights, neither side wanted to default.”

Cowen urged investors to be on alert, pointing out that some members of the Freedom Caucus appear to perceive that defaulting on the debt would force the US to cut on its spending — remember that all raising the ceiling does is allow the federal government to pay for already existing debt.

While defaulting is not inevitable, Cowen wrote that they “believe this needs to be on the market’s radar now before there is a crisis.” “

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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