On January 19, 2023, the U.S. federal government officially reached its $31.38 trillion debt limit, forcing the Treasury Department to undertake “extraordinary measures” to keep paying off federal debt without going into default. As the possibility of default increases, market volatility could rise.
The federal government’s hitting the debt ceiling led the Treasury Department to implement extraordinary measures.
On January 24, 2023, U.S. Treasury Secretary Janet Yellen told Congress the Treasury had suspended depositing money into the Government Securities Investment Fund, also known as the “G Fund.” This is one of the extraordinary measures—accounting and budgetary tools—implemented by the Treasury to avoid default.
Other current extraordinary measures include suspending new deposits into the Civil Service Retirement and Disability Fund, as well as the Postal Service Retiree Health Benefits Fund. These measures are expected to prevent default until June.
The fight in Congress over the debt ceiling is expected to affect financial markets and the U.S. economy as a whole.
In 2011, a congressional standoff over the debt ceiling led to Standard & Poor’s downgrading the United States credit rating, which contributed to a plunge in stock prices. In an interview with MarketWatch, Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute, expressed concerns that the divided nature of Congress will lead to a similar standoff that will rattle financial markets.
Jonathan Rose, CEO of Genesis Gold Group, has predicted that the battle will devalue the U.S. dollar. In an interview with Fox Business, Rose said, “Our government is at risk of defaulting on its bills. If the federal government defaults on its loans, it will destroy whatever [consumer] faith might be left in the U.S. dollar and weaken it dramatically,” adding, “This environment creates a strong case for allocating funds to physical precious metals.”
Growing federal debt is projected to be a long-term issue.
Even aside from the debt ceiling showdown, the large size of the federal debt could negatively impact the economy. Currently, the U.S. national debt is on track to be 225% of GDP by 2050, according to projections by Wharton. This growing debt could have negative consequences for government programs. For example, the nonpartisan Congressional Budget Office has projected that the Social Security trust funds will be empty by 2033.
Consumer portfolios may be exposed to increased volatility as the showdown over the debt ceiling continues and federal debt continues to increase.
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