Debt Ceiling Expands & Lackluster Jobs Report

Weekly Newsletter- Week of 10.10.2021 

Debt Ceiling on the Rise 

This week Congress agreed to a short-term increase of the U.S. debt ceiling, avoiding a default and potentially additional economic pressure. Congress was able to temporarily agree on a debt limit extension that will run into December. ‍

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Federal Debt 

The federal debt is the amount of money the government owes for spending on its payments. Some of the payments include social security, Medicare, military salaries, and tax refunds. The debt limit allows the government to finance those obligations. Unfortunately, raising the country’s debt ceiling is effectively the same as raising the credit card balance. This does not put a plan in place to further pay down the debt. Rather, we just agreed we can go into further debt as a country. 

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Kicking the Can 

While able to avoid a government shutdown, kicking the can out to December will continue to put pressure on consumers. Without a resolution, the federal government could default on some of its obligations, including social security and military salaries & benefits. This means, without a resolution, social security checks could be delayed for several weeks- millions of Americans rely on these checks every month. The same pressures would also be applicable for Medicare, as well as many other programs. 

A potential downgrade of the United States’ credit rating would also have a very negative effect on U.S. Treasury. Treasury bonds may appear attractive to investors given their safety as a reliable investment asset. Should demand decrease, we could expect another rise in interest rates. And as we’ve seen over the last 12 months, when interest rates rise, high-flying stocks get hammered. All of this would apply additional pressure to future borrowing costs like car payments or credit cards. 

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Going Forward 

Uncertainty regarding the debt ceiling will continue to be a major driving force in the market until an actual resolution has been put in place. This goes beyond an extension, but rather a full plan to tackle rising debt. Market uncertainly alone can send rippling effects throughout the stock market. Since World War II, Congress has changed the debt ceiling no less than 100 times. In 2019, Congress voted to suspend the debt limit until July 2021. Now, Treasury is using ‘temporary emergency measures’ to buy more time and allow the government to keep paying its obligations.