Raise the Roof

Raise the roof has been a phrase used for a long time to mean "raise a ruckus" or "make an uproar". But the phrase takes on an entirely new meaning when it comes to the government and the debt ceiling. In this post, we'll look at the history of the debt ceiling, consider what it means for markets moving forward, and review what impact a potential resolution or lack thereof could have. 

A Brief History of the Debt Ceiling 

The first debt ceiling was established in 1917, when the Second Liberty Bond Act set a cap of $11.5 billion on the total debt the government could accrue. Since then, the debt ceiling has been raised 78 times to accommodate the government's need for more borrowing. Currently, the national debt ceiling stands at $31.3 trillion, a level we have now exceeded. 

What Does This Mean for the Markets? 

The difference between revenues and spending is around $994.3 billion. This is the expected deficit for 2022. Treasury Secretary Janet Yellen estimated the U.S. would hit the debt limit on January 19th, which has happened, and that "it is unlikely that cash and extraordinary measures will be exhausted before early June." If we get past June and no resolution is reached, the US government would default on certain payments.

Historically, stock markets have gotten the jitters a month or two before the unofficial debt-limit deadline (mid-summer in our case), but prices of both stocks and bonds have increased in recent weeks, signaling confidence that a decision will be reached. 

The debt ceiling is a delicate conversation in the US government, but markets are currently behaving as though a resolution will be reached in time. The cost of money, driven by the central bank, we believe will likely have a more prominent role in driving markets than short-term political indecision.  

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