Ecoinometrics - As an investor should you care about the debt ceiling?
Interest rates, interest rates, interest rates
There is only three things you need to understand to figure out what macro regime we are in. Those three things are: interest rates, interest rates and interest rates.
What happens over the last 12 months should have made that obvious.
So here is one question: how does reaching the debt ceiling affect interest rates?
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As an investor should you care about the debt ceiling?
What is the debt ceiling?
In case you aren’t super familiar with the debt ceiling in the US here is a tl;dr version.
In the US the congress sets some limit on the total amount of money the US Treasury is allowed to issue as national debt.
In theory this limit is put in place to rein in the tendency of the Federal government to borrow money for everything it wants to do. In practice, as we’ll see in the next section, it is being raised every time the US Treasury needs more cash.
So as you can see with the evolution of the Federal debt on the chart below the effectiveness of this debt ceiling is rather questionable.
It isn’t even like the debt ceiling really is a hard limit. Since its creation in 1917 the debt ceiling has been suspended in many instances such as:
For emergency spending in case of war, economic crisis or natural disaster.
For so called prior comitements i.e. when some government program that has already been voted requires more money than the US Treasury has, the congress will allow more debt to be issued even if that is breaking the debt ceiling.
For high risk of default situations i.e. if it looks like the US will be forced to default on its debt unless the debt ceiling is breached the congress can suspend it.
When you take into account all these “exceptions” you realize that there are basically no situations under which the debt ceiling is not going to be raised eventually.
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