Another Debt Ceiling Dilemma
BOSTON, MA, May 8, 2023 — What are the implications of a breach in the U.S. debt ceiling?
As noted in our first debt ceiling discussion published in January 2023, it is important to understand that an increase or suspension of the debt limit does not authorize new spending, nor does it cost taxpayers additional money. Rather, it allows the government to finance existing legal obligations that the President and Congress have made and agreed to in the past.
Between 1995 and today, there have been a total of four debt ceiling crises. During these crises, several variable costs have emerged; the government shutdown of 1995 and the Standard & Poor’s downgrade of the United States’ credit rating in 2011 are just two examples. One could argue that the credit rating downgrade had a substantial economic, financial, and reputational impact on the United States. Following the downgrade, the Dow Jones Industrial Average had one of its worst days in history, falling 635 points on August 8 of that year. Similarly, the delay in raising the debt ceiling resulted in an increase of $1.3bn in borrowing costs.
Investors should be concerned about a possible breach because of the potential economic impact both nationally and globally, the cost to taxpayers, the reputational cost of not protecting the full faith and credit of the United States, and the resulting fallout to investment performance and volatility.
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