What is the US Debt Ceiling, and should I care?

The US Debt Ceiling is likely a concept that you’ve heard of or read headlines about within the last couple of months.  It is starting to garner a little more attention given the proximity to the June 1st “X-date”.

In short, the debt ceiling is a restriction imposed by the US Congress on the amount of debt outstanding the Federal Government can have.  The purpose of a ceiling is to ensure that the federal government doesn’t increase its debt load to the point that it cannot pay its obligations and maintain future investments.

Every year that there is a budgetary deficit (i.e. revenue from federal tax is less than current government spending), the national debt increases.  The federal government must borrow from the US Treasury to pay for services and programs for the well-being of all US citizens.  The US Treasury raises money by selling marketable securities to outside investors (i.e. foreign governments; institutional investors; etc.).

Is this the first time the debt ceiling has ever been reached?  The answer is a resounding no.  Over the past 60 years, the debt ceiling has increased 89 times.  Money is borrowed, obligations get paid, and the economy continues to tick along.

Should investors use this information to change their investment strategy?  I would suggest no.  This same scenario has occurred 89 times before, and the market has continued to provide long-term growth.  Long-term investors need not worry.  Short-term investors should already have their money in a suitable portfolio that will limit their exposure to the inevitable short-term volatility.

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