The Debt Ceiling Has Been Reached Again

December 27, 2012

Treasury Secretary Geithner announced today that we would reach the debt ceiling on December 31. 2012.  However, he has some options -like postponing payments to pension plans- that will keep us from defaulting until as late as April.
 
President Obama would like the debt ceiling raised as part of the "Fiscal Cliff" agreement. Rather than come to congress every time the debt ceiling is reached, Mr. Obama would like Congress to give the President authority to raise the debt-ceiling limit whenever it was needed. The Republicans proposed this once in the past as well. I do not think this can pass the House at this time.
 
Incidentally, the debt ceiling came out of the debate to establish the Federal Reserve in 1913.  Congress was worried that the government would spend and the Federal Reserve would print too much money debasing the dollar and destroying purchasing power. So In order to get the votes needed to establish the Federal Reserve, Congress passed a bill limiting the amount of Sovereign debt that could be issued to $2 billion dollars.  We are now talking $18 trillion as a stopgap measure. 
 
In any event, the debt ceiling will probably be part of the Fiscal Cliff negotiations.  If you remember the last time we debated the debt ceiling, it took a 10% market correction before the politicians got serious.  Also, we might see S&P start talking about another credit rating downgrade if it seems that the political parties cannot get something done. It may be different this time, but keep your positions hedged if possible.