It is understandable if the daily barrage of headlines about the debt ceiling has you worried. In recent years, the debt ceiling has become a political football, with Republicans and Democrats often using it as leverage in budget negotiations. This has led to a number of close calls, with the government coming within days of reaching its debt limit.
What is the debt ceiling?
The debt ceiling is a legislative limit on the amount of money that the United States government can borrow. When the debt ceiling is reached, the government is unable to borrow any more money.
However, despite the political drama, investors should not panic about debt ceiling headlines. Here are a few reasons why:
- The United States has never defaulted on its debt. The government has always found a way to raise the debt ceiling, even when it has been a close call.
- Since 1960, Congress has raised the debt ceiling 78 times – 49 times under Republican presidents and 29 times under Democratic presidents.
- The stock and bond markets price in future expectations daily. The Vanguard Total Stock Market ETF (VTI) is up 8.1% year-to-date and the Vanguard Total Bond Market ETF (BND) is up 2.17% year-to-date. If the world’s largest economy was truly near defaulting on its debt, the markets would already be down significantly. The markets are telling us this is a “political crisis” and not a “financial crisis”.
What happened in 2011 and 2013 with Debt Ceiling Standoffs?
The debt ceiling has been raised nearly 80 times in the last 60 years. The political drama regarding the raising of the debt limit escalated in 2011 and 2013. In both cases, Congress eventually raised the debt ceiling limit.
Should I adjust my investment strategy due to the debt ceiling debate?
In our opinion, the answer is no. Of course, there is always a risk that the government could default on its debt. However, the odds of this happening are extremely low. The debt ceiling is a political issue. As we can see from the chart, long-term investors were rewarded within the following year after the 2011 and 2013 debt ceiling concerns resolved. Investors should not let the debt ceiling crisis distract them from their long-term investment goals.