HALFWAY THROUGH | H1 2024 RECAP
In equity markets, particularly the US S&P and Nasdaq, most of the heavy lifting has been done by ‘big tech’ but the outlook for the broader market has improved.
Debt Limit or Debt Ceiling
AN IMPORTANT UPDATE ON THE USA’S DEBT CEILING – BRACE YOURSELVES, IT WILL BE BACK!
Introduction
The recent Debt Ceiling issue in the United States, the world’s largest economy, has sparked numerous questions and concerns. Today, we aim to shed some light on this topic and provide insights into what the future holds. With the clock ticking, the United States has adjusted its debt ceiling, the maximum borrowing limit set by the government, in order to meet its financial obligations. However, it’s important to note that this is not a permanent solution – the issue will resurface in 2025, as it has done many times before. It is thus prudent that we delve deeper into what the debt ceiling entails and take a look at its implications.
What is the Debt Ceiling?
In the United States, the debt ceiling, also known as the debt limit, is a legislative constraint on the amount of national debt that the U.S. Treasury can incur. It effectively limits how much money the federal government can borrow to cover its existing debt and finance its operations. In simpler terms, it determines the extent to which the government can borrow funds to pay its bills.
The Current Situation
As of October 2022, the debt ceiling stands at a staggering $31.4 trillion. This debt must be incurred due to US tax revenue only covering approximately 75 cents of every dollar the government spends. The remaining 25 percent must be borrowed. Consequently, as the United States approaches the “X date,” which signifies the date when the National Treasury runs out of money, the debt ceiling becomes a pressing issue.
Historical Precedent
Throughout history, the United States has never breached its debt ceiling without Congress raising or suspending the statutory limit on federal debt. Economists widely agree that such an event, even a brief default, would have grave, albeit easily avoidable, economic consequences. It is nearly inconceivable to imagine Congress allowing a default to occur. Doing so would be a catastrophic mistake, leading to increased costs of servicing US debts in the future. It would also cause interest rates to rise and create stress in equity markets. Moreover, there would be no political winners in the dangerous, never-ending game of brinkmanship (the practice of pursuing a dangerous policy to the limits of safety before stopping, especially in politics) between the Republicans and the Democrats.
Looking Ahead
Since 1960, Congress has raised the debt ceiling without defaulting a total of 78 times, demonstrating a track record of sticking a temporary band-aid over an increasingly dangerous and potentially disastrous outcome. It’s crucial to recognise that this is a recurring issue that demands attention every few years. While short-term fixes may be implemented, developing a long-term strategy to address the underlying factors contributing to the ever-increasing debt is absolutely essential.
Conclusion
The United States’ debt ceiling is a pivotal aspect of its financial landscape, dictating the government’s borrowing limits and ability to meet its obligations. As we navigate the current adjustment in the debt ceiling, it’s essential to remain cognizant of the potential economic ramifications and the imperative role of the US Congress in resolving this issue. While history provides some reassurance that a default is highly unlikely, the recurrence of this problem underscores the need for proactive measures to tackle the Land of the Free’s mounting debt. Only time will tell what the future holds, but for now, we must keep a watchful eye on the ever-present spectre of the debt ceiling and its impact on the world’s largest economy.
