01.18.2023 The Treasury Department announced Friday that the US will officially reach its debt limit on January 19, at which point it will have to begin using accounting tools known as “extraordinary measures” to fund federal obligations. Such measures, it is estimated, could stretch the budget until at least early June to stave off the threat of default. We expect the debt ceiling debate to culminate in a showdown in today’s contentious Congress.

US debt verses debt ceiling chart in trillion

The debt limit has been raised or suspended by Congressional action 61 times since 1978 and these events have become increasingly problematic. The standoff culminating in the 2011 debt ceiling crisis featured the first-ever downgrade of America’s credit, when Standard & Poor’s cut its rating from AAA to AA+. Such credit downgrades can potentially raise government borrowing costs, although the other major rating agencies, Moody’s and Fitch, kept the US at AAA.

2011 Debt Ceiling Debate Gold and Treasurys

If an agreement can’t be reached this time around, House Republicans plan to tell the US Treasury and the Biden administration to give spending priority to only the most critical payments, such as interest on the national debt, Social Security, Medicare and military funding, according to The Washington Post.

Investors are bracing for increased volatility in financial markets and a further erosion in consumer confidence as the debt ceiling debate intensifies. Recent strength in gold, along with a weakening US dollar, may in fact be signaling a loss of investor faith in the ability of Congress to resolve the nation’s debt issue.

Gold vs the Dollar Cumulative change since February 19 2022 graph

Bottom Line: We expect a Congressional showdown and, given the grandstanding opportunities, a government shutdown – likely around June. Such a scenario would benefit bonds and gold while disadvantaging equities and the dollar. Foreign developed markets could benefit at the expense of US equities on eroding investor confidence.