Debt Ceiling Déjà Vu

Here we go again.  Republicans and Democrats are squaring off over whether to raise the debt ceiling.  The country is facing a partial government shutdown if Congress fails to act by midnight on September 30th.  Only essential services – national security, border protection, air traffic control, etc. – would continue to operate.  Beyond that point, Treasury Secretary, Janet Yellen says the United States government won’t be able to pay its bills and warns of “catastrophic economic consequences” if the debt ceiling isn’t raised by October 18th.

 

The polarized political environment in Washington seems to have created a situation where the two sides are unwilling to compromise until the last possible moment – a political game of chicken if you will.  Democrats are saying that raising the debt limit should be agreed upon in a bipartisan manner because the policies of the former President, a Republican, are why we need to increase the limit.  Republicans are refusing to come on board saying that the Democrats have a majority in both the House and Senate and, therefore, should be able to raise the debt limit on their own.

Unfortunately, this is nothing new from Washington.  Since 1980 there have been 14 government shutdowns lasting from anywhere from 1 to 34 days.   The short-term effect on the stock market has been for the most part fairly minimal. The 2011 debt-ceiling crisis was a close call as the United States came to within a few days of defaulting on its obligations.  The stock market did react negatively to the news coming out of Washington, falling 17% from July 7th to August 8th, 2011, but had recovered within six months.  In a controversial decision, the Standard & Poor’s credit rating agency downgraded the US government’s debt for the first time in the country’s history.  While the worst-case scenario was averted there were certainly consequences, some of which are still being felt today.

 

Market downturns are not an uncommon occurrence and serve an important function.  They squeeze out excesses and provide opportunities for patient, disciplined investors.

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