The US government will hit the debt ceiling on Thursday

key takeaways

• The US government is expected to hit the debt ceiling next Thursday, which means Congress must approve a $31.4 trillion limit hike.
• Treasury Secretary Janet Yellen wrote to House Speaker Kevin McCarthy saying that if the ceiling is not raised, it could cause “irreparable damage to the American economy.”
• In the past, failure to reach an agreement has led to government shutdowns, including a protracted 35-day standoff over President Trump’s proposed US-Mexico border wall.

The United States is reaching its debt limit next Thursday, and Congress has been notified of this fact by Treasury Secretary Janet Yellen. For the government to run out of credit may seem pretty dramatic, and while it’s not exactly nothingIt is also a situation that occurs semi-regularly.

Even so, Yellen did not mince words in her letter to House Speaker Kevin McCarthy, stating that “failure to meet government obligations would cause irreparable damage to the American economy, the livelihoods of all Americans, and the global financial stability. I respectfully urge Congress to act expeditiously to protect the full faith and credit of the United States.”

Usually this sort of thing is a bit of a formality for Congress, but these days we can’t necessarily trust anything goes smoothly in washington dc

So what does this debt limit mean, and what happens if Congress doesn’t pass an extension?

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What is the legal debt limit?

The US statutory debt limit is a legal cap set by Congress on the amount of debt the federal government can accumulate. The debt limit is intended to provide a mechanism for Congress to exercise control over government borrowing and to ensure that the government lives within its means.

It’s often described as the national credit card limit, but the reality is a bit more complicated than that.

When the government spends more money than it receives through tax revenue and other means, it needs to borrow money to make up the difference. The debt limit controls how much the government can borrow to finance its operations. If the government reaches the debt limit, it cannot borrow more money until Congress raises the limit.

The practice is designed to keep the government in check and make them justify their spending to Congress. It is designed to prevent a president and his government from running amok and running up huge unchecked debts.

In recent years, raising the debt limit has become a somewhat contentious issue, with some lawmakers arguing that the government should cut spending rather than borrow more.

It is important to note that the debt limit does not control government spending, it only controls the amount of debt the government can accumulate to finance that spending.

The government can continue to spend money even if it hits the debt limit, but it can’t borrow more money to finance that spending. This can lead to a situation known as a “debt ceiling crisis” where the government is unable to pay its bills and defaults on its debt, causing significant financial and economic consequences.

The current the debt limit is set at $31.4 trillion.

Has the limit been reached before?

Yes, the debt limit has been reached multiple times in the past, and the US government has taken various steps to avoid defaulting on your debt.

When the debt limit is reached, the Treasury Department can take “extraordinary measures” to free up additional borrowing space, such as suspending investments in certain government retirement funds. These measures can create additional lending space, but they are only temporary and can only be used for a limited period of time.

When the indebtedness limit is reached and these extraordinary measures have been exhausted, the Treasury Department must prioritize the payment of government bills and obligations.

This means that some bills may not be paid and the government may default on certain obligations, such as payments to government contractors or interest on the national debt. This can have serious financial and economic consequences.

In 2011 and 2013, the debt limit became a contentious issue, sparking a political showdown between Congress and the White House. This led to a government shutdown in 2013, which lasted 16 days, as Congress and the White House could not reach an agreement on raising the debt limit. This has caused great turmoil in the financial markets and strain on the economy.

The government also shut down for four days in January 2018, with the US experiencing its longest-ever shutdown of 35 days between December 22, 2018 and January 25, 2019. This came as a result of a Deadlock over President Donald Trump’s proposed spending package for the US-Mexico border wall.

In recent years, the debt limit has been raised regularly with less controversy, but the debt limit issue can still be a potential political flashpoint.

What would a shutdown mean for the stock markets?

The last thing the markets need right now is more bad news. With interest rates rising, inflation still high, and economic growth accelerating, many are concerned that there is even worse to come with the stock markets.

It is difficult to predict exactly how the stock market will react to a government shutdown, as it will depend on the specific circumstances and the duration of the shutdown. A few days is not likely to cause much concern, but a longer time frame could add to the uncertainty surrounding stocks.

That said, Congress is not currently facing any particular issue as contentious as Trump’s wall. With that in mind, it is unlikely that we will see a prolonged shutdown as we say in 2018/19.

How can investors help protect against insecurity?

Right now, the markets are like a little kid scared by the monsters under the bed. There are constant scares and bumps that make them very nervous and on edge, particularly after the ordeal in 2022.

It means that stocks in particular are primed to react strongly to negative news.

That’s why many analysts are predicting that volatility will continue, at least through the first half of 2023. So what do you do as an investor? Sit on the sidelines and wait? It could, but then you risk missing out on the best days when the market starts to turn.

One way to stay in the game while limiting your downside is to implement coverage strategies. You know “hedge funds”? Yes, that’s where they got their name from. They do a lot of fancy financial stuff to make sure they always make money, no matter if the markets are going up or down.

Sounds complicated? This. Fortunately, there is an easier way.

Use Q.ai. We have packed all this technical financial knowledge into our portfolio protection, which acts like a hedge fund in your pocket. It implements complex strategies such as hedging, without any input from you.

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