Should i sell stocks before debt ceiling

In the following commentary, we answer the most frequently asked questions about the debt ceiling and conclude with an optimistic view that the latest standoff will pass without meaningful incident. Congress has voted to increase the limit many times since , including 18 times during the Reagan administration, eight times during the Clinton administration, and seven times during George W. Congress even raised the debt ceiling five times during the Obama administration, when the process was more contentious.

The Trump administration raised the debt ceiling multiple times before suspending it in According to US Treasury Secretary Janet Yellen, the government has so far managed to pay its bills through extraordinary measures and accounting maneuvers. Extraordinary measures have included suspending investments in certain government pension funds, suspending state and local government series securities, and borrowing money set aside to manage exchange rate fluctuations.

The Treasury Department has not provided a specific estimate for how long the extraordinary measures will last, but Yellen estimated that cash and extraordinary measures could be exhausted in October. After that date, the US Treasury will no longer be able to issue new debt to fund expenses. The Treasury would have to prioritize how to spend that money, but it would be enough to cover Social Security and Medicare payments, debt service, and payments to the military. But without being able to borrow from the market, the government would be strapped.

Everything from federal salaries to IRS refunds to payments to the Department of Education could be cut off. The federal government employs 2. Ultimately, we expect the debt ceiling to be raised. Make no mistake, the debate will be very combative, and we will likely once again approach the 11 th hour with the outcome unknown. Even in a best-case scenario where the impasse is short lived, the economy is likely to suffer sustained—and completely avoidable—damage, particularly given the challenges that COVID poses to the health of the economy.

Some estimates suggest that this advantage lowers the interest rate the government pays on Treasuries relative to interest rates on the debt of other sovereign nations by something on the order of 25 basis points a quarter of a percentage point on average. Even if only some of this advantage were lost by allowing the debt limit to bind, the cost to the taxpayer could be significant. One cannot predict how Treasury will operate when the debt limit binds, given that this would be unprecedented.

Treasury did have a contingency plan in place in when the country faced a similar situation, and it seems likely that Treasury would follow the contours of that plan if the debt limit binds this year. Under the plan, there would be no default on Treasury securities. Treasury would continue to pay interest on those Treasury securities as it comes due. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount and thus not increasing the overall stock of debt held by the public.

Timely payments of interest and principal of Treasury securities alongside delays in other federal obligations would likely result in legal challenges. On the one hand, the motivation to pay principal and interest on time to avoid a default on Treasury securities is clear; on the other, lawsuits would probably argue that holders of Treasury securities have no legal standing to be paid before others.

It is not clear how such litigation would turn out, in part because the law itself imposes contradictory requirements on the government—requiring it to make payments, honor the debt, and not go above the debt limit, three things that cannot all happen at once.

If the debt limit binds, and the Treasury were to make interest payments, then other outlays will have to be cut by about 40 percent in aggregate. The need for the sharp cut reflects two factors. First, the government is running annual deficits: for fiscal year as a whole, CBO expects 22 cents of every dollar of non-interest outlays to be financed by borrowing. Second, infusions of cash to the Treasury from tax revenues vary greatly by month, and tax revenues in October and November tend to be fairly muted.

Thus, the required cuts to federal spending when an increase in federal debt is precluded are particularly large during these months. If Treasury wanted to be certain that it always had sufficient cash on hand to cover all interest payments, it might need to cut non-interest spending by more than 40 percent.

The extent of the economic costs of the debt limit binding, while assuredly negative, are enormously uncertain. Assuming interest and principal is paid on time, the very short-term effects largely depend on the expectations of financial market participants, businesses, and households. Would the stock market tumble precipitously the first day that a Social Security payment is delayed? But with the deadline only days away, Congress has voted to extend the debt limit through early December.

On Thursday, President Joe Biden signed the bill into law, putting off the drama for a few weeks. A default is still unlikely and has never happened in US history but if it did, it would have catastrophic implications for the US and the global economy. Impasses over the debt ceiling are not new in Washington politics, but amid a sluggish economic recovery from the ongoing Covid pandemic, there were some jitters in financial markets.

Here's what you need to know about the debt ceiling debate. The US government spends more money than it collects in taxes, so it borrows to make up for the shortfall. Borrowing is done via the US Treasury, through the issuing of bonds. US government bonds are seen as among the world's safest and most reliable investments.

In , Congress established an aggregate limit or "ceiling" on how much debt the government can accumulate. The ceiling has been lifted on more than occasions to allow the government to borrow more.

Congress often acts on it in a bipartisan manner and it is rarely the subject of a political standoff. As the country has become more bitterly partisan, however, lawmakers have used the debt ceiling vote as leverage against other issues.

In a standoff, the last time the US was in serious danger of going over a "debt cliff", Republicans put up a blockade over the spending plans of President Barack Obama, a Democrat. But, if history is any guide, lawmakers typically back down at the eleventh hour.

The Fed rolls back economic stimulus. Janet Yellen: Inflation expectations remain well anchored. Munger: Communist China handles economic booms better than capitalist America. Your Thanksgiving meal will cost more this year. Supply chain crunch has Americans in a scramble. Find out why. Supply chain backlog weighs on US economic growth. Toys stuck in supply chain chaos. Not a subscriber? You can sign up right here. Investors no doubt should be relieved.

Alarm bells had been ringing on Wall Street for weeks, and JPMorgan Chase was already hard at work preparing for a potential default by the world's largest economy.

But the reprieve is only temporary. Once the Senate's stopgap measure is approved by the House of Representatives, the Treasury will be able to pay its bills through December 3.

Incidentally, that's also the deadline for averting a government shutdown.