Political Debt Ceiling Chicken

We receive many questions about the federal debt ceiling and the financial implications it could have on the dollar and on investment portfolios.

The US house of representatives passed a debt limit increase last week tied with spending cuts, but that bill is supposedly doomed to pass through the senate and President Biden has stated that he plans on vetoing the bill if it makes it to his desk.

So the debt limit raise is still being heavily debated as we approach the deadline.

To state the obvious the debt ceiling not being raised would have material impact on the price of US backed securities, such as the dollar, along with treasury bills, notes, and bonds. And since US businesses and international businesses hold dollars, bills, notes, and bonds backed by the treasury and the US government, a downgrade would have material impact on earnings and growth. That is the threat we face.

Any politician with enough brains to see that would be stupid to not raise the limit, because, at the very least, it would certainly spell the end of their political career, and they’d also be known for one of the worst political blunders of the 21st century.

Of course in a divided congress this issue can be leveraged, and more so because it is a highly important issue that must move through Congress. It’s a game political chicken and someone will jump out of the way given enough time and force, the biggest question is who and how soon to the end.

Several times in our past the debt ceiling has been used in this way and each time has resolved the same, they knew the psychology then and they know it now.

Let me be clear there is no doubt in my mind that the limit will be raised and I believe that because the outcomes are theorized to be severe and everyone knows it.