The US hit the debt ceiling on January 19th of 2023. As of today, Congress has not yet voted to raise the debt limit, which it must do before it can borrow the additional funds necessary to pay for its approved budgeted spending (not unapproved future spending) on everything from salaries for military personnel to crucial social programs like Social Security and Medicare.¹ 

The US Department of the Treasury has already started taking “extraordinary measures” to keep the United States from defaulting on its obligations at least until June of this year.²  As the threat of default looms, a partisan debate is happening in Congress – with Republicans demanding spending cuts before agreeing to vote to raise the debt limit again and Democrats saying they will not negotiate the debt ceiling.³  

To help you better understand this situation – and how your portfolio might be impacted – here is a look at the current debt ceiling debate in the US in context of what happened when we last faced a near-default in 2011.

What is the Debt Ceiling?

When the government spends more money than it takes in, it must borrow money to meet its financial obligations. Ever since the passage of the Second Liberty Bond Act in 1917, US law has required that Congress first vote to increase the debt ceiling before the government can issue any more debt to cover spending it has already agreed to.⁴ 

A long-time source of controversy, partisan debt-ceiling debates about government spending and debt have sometimes led to instances of political brinkmanship. But these standoffs have always ended in a vote to raise the debt ceiling. According to the US Treasury, Congress has raised the debt ceiling 78 times since 1960 – under Presidential administrations led by both Republicans (49 times) and Democrats (29 times).⁵

The State of the National Debt and the Balance of Power

The national debt, representing the entire amount of debt accumulated by the Federal Government, currently stands at approximately $31.45 trillion.⁶ 

Our nation’s debt has increased under both Democratic and Republican presidential administrations and during periods of time when Democrats and Republicans were in control of the House of Representatives and/or Senate.⁷  

Today, just as in 2011, both the Presidency and Senate are controlled by Democrats and the House of Representatives controlled by Republicans. However, the Republicans have a much narrower margin this year. This situation surrounding the debt ceiling today is again likely to come down to the wire. 

What Happened When the US Came Close to Default in 2011 

The US previously came dangerously close to default during the Obama Administration, when Congressional Republicans refused to raise the debt ceiling without spending cuts. According to the Government Accountability Office (GAO), the US reached its debt limit on May 16, 2011 and the US Treasury began taking extraordinary measures projected to extend the Treasury’s borrowing authority until July 8th of 2011.⁸ 

One result of the near default in 2011 was that, for the first time in the history of the United States, Standard & Poor’s downgraded the nation’s credit rating to AA+.⁹ Rating agency Moody’s also lowered its outlook on US debt to negative while maintaining its AAA rating.¹⁰ 

Global financial stability was threatened during this time. Markets were volatile. The S&P 500 started to fall in July of 2011 and by that August, it had fallen by over 16%.¹¹  

Two days before the expected default of 2011, a compromise was reached to raise the debt ceiling and reduce government spending. Default on the debt was avoided, but many economists believe that the cuts in spending had a negative impact on economic recovery after the great recession.¹² The GAO also estimated that delays in raising the debt limit in 2011 increased Treasury’s borrowing costs by about $1.3 billion that fiscal year.¹³

Is Default Likely in 2023? What Might Happen if there is a Default?    

If we look at what happened in 2011 for insight about what might occur in 2023, as we get closer to the date when the Treasury Department can no longer avoid non-payment of bond interest, social security, etc. we can predict that we are likely to see greater stock and bond market volatility. While it is unlikely, default is possible given the position of a sector of the Republican Party. 

S&P Global Ratings put out a bulletin on the debt ceiling crisis in January of 2023 predicting that after engaging in “brinkmanship” that Congress will “address it on time” to” prevent severe consequences on financial markets and the global economy.” ¹⁴ Mark Zandi, the Chief Economist of Moody’s Analytics, published a slightly less optimistic analysis of the situation that same month, warning that rampant polarization and “heightened dysfunction in Congress” make the odds of default “uncomfortably high” and forecasting that – if default does occur – “interest rates will spike, and stock prices will crater with enormous costs to taxpayers and the economy.”¹⁵

Since it has never happened before, no one is certain of exactly what would happen in the event of a default, but I believe that would trigger US debt being further downgraded, borrowing costs going up and that major stock and bond market sell offs would be likely.