“Debt Ceiling Showdown“
I thought this recent article from Capital Group did a good job summarizing the debt ceiling issues and what, if anything, investors should be doing as a result. Unfortunately, the reality is that we’ve been here before in 2011 and 2013 so what can we learn from how things played out in the past?
Stop us if you’ve heard this one before: U.S. lawmakers are clashing over a legislative action to raise the federal debt ceiling. The issue has been percolating for months but could come to a head this summer as the U.S. Treasury starts running out of money to pay its bills.
The decision to increase the nation’s debt limit is often a routine one — except in years when Congress is divided, like it is now. With Republicans controlling the House of Representatives and Democrats in command of the Senate, the scene is set for what could be one of the most contentious debt ceiling showdowns in recent history.
So far, Democrats have said they won’t negotiate on the issue, while many Republicans have said they won’t vote to lift the debt limit without some additional agreements to curb federal spending.
“This could be the worst standoff we’ve ever witnessed,” says Capital Group political economist Matt Miller. “It certainly has the potential to be at least as bad as 2011.”
That’s the year Standard & Poor’s cut the United States’ prized AAA credit rating to AA-plus (where it remains) amid concerns about the government’s budget deficit, a growing long-term debt burden and political conflicts over raising the debt limit. The move unnerved U.S. financial markets for a time, but they quickly recovered.