Introduction
Congress has wrestled with the debt ceiling in recent years, sparking market volatility. While a Global Equities portfolio generally has a large weighting of domestic equities, weightings in international equities have added value to the strategy returns.
The Current Debt Ceiling Status
On January 19th, Treasury Secretary Janet Yellen announced the U.S. hit its $31.38 Trillion debt ceiling. Extraordinary measures, like deferring pension investments, were initiated to preserve cash. Yellen warned of cash depletion by June 5th without a Congressional-White House agreement to raise the ceiling.
Failure to raise the debt ceiling carries serious consequences: default on government securities, credit rating downgrades, and inability to meet obligations to retirees and contractors. Additionally, it could affect the US’s status as the world’s reserve currency, exacerbating risks of recession, inflation, and geopolitical instability, destabilizing markets.
History of the Debt Ceiling Concept
The concept of a national debt limit isn’t in the U.S. Constitution. Congress introduced it in 1917 to garner support for entering World War I. Over time, it needed frequent adjustments, especially post-World War II, to meet expanding obligations, including social programs, military spending, and pandemic relief. Congress acted to raise, modify, or temporarily suspend the debt limit 102 times since the end of WW2. This is nearly once for every year the legislation has been in existence.
Since WW2, adjusting the debt ceiling became routine and unnoticed. Recently, it’s become a political issue, sparking debates on fiscal responsibility and the growing national debt. “Both Republican and Democratic administrations have contributed to debt increases through spending hikes and tax cuts, leading to frequent adjustments or temporary suspensions of the debt ceiling”.
Source: What is the debt ceiling, and does it matter?” 1/20/23 John Hancock Investment Management
Memorial Day Weekend Negotiations
On May 28th, President Biden and House Speaker Kevin McCarthy announced a bipartisan agreement on the debt ceiling. The measure awaits Congressional approval and may face procedural hurdles. If passed, it would raise the debt ceiling and limit government spending for two years.
Conclusion
Hemispheres views the Debt Ceiling Agreement as a compromise, leaving neither party completely content. While it would curb spending, proposed cuts and COVID relief clawbacks wouldn’t significantly lower inflation. Consequently, if passed, minimal changes are expected. Nonetheless, enactment would prevent default, mitigate market volatility, and lessen the risk of a severe recession.
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