The debt limit—we’ve been here before

In Yellen’s estimation, those measures can carry the government through at least early June without Congress raising the debt limit, so there is still time for the issue to be resolved. However, the true deadline for congressional action can be difficult to estimate this far in the future, and it will be revised as more information, such as the level of incoming federal revenue, becomes available in the coming months. These temporary extraordinary measures essentially mean reprioritizing federal government expenditures, such as deferring investments in the government’s pension funds to pay higher-priority obligations. The U.S. has navigated similar territory before, including in 2011, 2013, and 2021.

The debt limit, or debt ceiling, is the statutory limit on the amount of debt the U.S. Treasury can have outstanding to pay for the government’s bills, obligations, and current and past expenses that Congress has already approved. It is not an authorization for future spending.

Without Congress raising the debt limit, the U.S. could eventually default on its debt and obligations—an unprecedented event with potentially serious impact on global markets and economies. 

Over the decades, Congress has raised the debt limit dozens of times—usually a routine affair. But there are notable exceptions, such as in 2011, when the government increased its borrowing capacity just days before it would have exhausted its cash balance. That year Standard & Poor’s downgraded the credit rating of the United States from AAA to AA+, partly citing the “political brinkmanship” that was resolved only at the last minute.

Such brinkmanship can erode the perception of the government’s willingness and ability to service its debts, which may result in higher financing costs, debt downgrades, and greater market volatility.

These episodes surrounding the debt limit have happened in the past and undoubtedly will happen in the future. Nevertheless, the very nature of this situation brings uncertainty, and the markets don’t like uncertainty—which can mean greater volatility over the short term. But it’s important to remember that volatility goes in both directions—up as well as down—and the markets are efficient at processing news. Time in the markets is ultimately better for your portfolio than market timing.

As we learn more between now and an ultimate resolution, we encourage investors to focus on the things they can control. In uncertain times like these, we believe it’s best to stay the course and remember Vanguard’s fourth principle for successful investing—maintain perspective and long-term discipline.

• What to know about a potential U.S. debt default (Vanguard Institutional article, issued September 2021) 
  
• Vanguard’s principles for investing success 
• Perspectives and commentary