The Debt Ceiling Mirage

Tradier  |

Image: US Treasury Building. Source: Sealy J, CC BY-SA 4.0, via Wikimedia Commons

The US debt ceiling or debt limit is a legislative limit on the national debt that the US Treasury can incur. October 18 was the line in the sand for the US debt. The debt ceiling limits how much money the federal government may pay on the debt previously borrowed. Without Congress increasing the level, the government risks a default, weighing on the world’s faith in the US and likely causing a credit downgrade.

Political division was impacting the debt ceiling

 - Republicans wanted Democrats to “own” the rising debt ceiling, making the majority party increase the level without any opposition support.

 - Democrats argued the debt was the result of prior administrations run by both parties.

 - The US Treasury Secretary warned of catastrophic economic consequences if the US defaults.

Capitulation leads to a temporary fix

 - Eleven Republican Senators, including minority leader McConnell, voted with all Democrats to break the logjam and kick the can down the road.

 - The deal increased the debt ceiling by $480 billion.

 - The new line in the sand for the partisan battle is in early December.The stock market rallied on news of the deal on Thursday.

Expect more concerns as December approaches

 - The current US national debt stands at over $28.852 trillion.

 - Republicans and Democrats disagree on the impact of the infrastructure package and budget initiative on the debt.In November,

 - Congress will need to address the need to raise the debt ceiling.

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No choice as credit and faith are critical

 - In November, we will see more political wrangling on the debt ceiling that may even go to the eleventh hour in early December.

 - The ceiling is going higher, no matter how loud the rhetoric gets.

 - Jeopardizing the full faith in the US and its credit rating is something no politician wants on a resume.

 - Stocks could be bumpy when the issue comes up again in November.

 - A higher debt limit is inflationary as it dilutes money’s value and increases prices across all asset classes.

 - More debt lowers the chances of hawkish money policy as higher rates increase the cost of servicing debt.

 - Each 25 basis points in interest on $30 trillion in debt costs $75 billion annually, compounding over time.

The debt ceiling issue is a mirage as it will continue to move higher as long as government spending rises and tax receipts cannot cover the costs. Asset inflation continues to increase with US debt, which could be bullish for the stock market.

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Equities News Contributor: Tradier, Inc.

Source: Equities News

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