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What is the debt ceiling?

It is the maximum level debt the US can legally owe around the world. It currently stands at $31.4 trillion USD, and it is expected that the debt ceiling will be hit next week.

Who is owed money by the US government? People and institutions, including buyers of government-issued securities, the US Federal Reserve, or other central banks.  Of those to whom the US government owes money, 2/3 are within the US and 1/3 are abroad), with Japan, China and the UK leading the list of countries abroad.

Let's start with the Good.

Congress has raised the the US debt level many times in the past. Congress can avoid breaching the debt limit ($31.4 trillion) if they vote to raise the debt ceiling. That seems simple enough.

The Bad.

There is a new Republican House Speaker in the US House of Representative. He has power and Republicans want him to use it. To avert the debt crisis, a deal needs to be struck between the Democrats and the Republicans. If you haven't heard, they don't get along. If a deal can't be made, the debt ceiling will be surpassed.

The Ugly.

The Canadian economy is closely tied to the US economy. The US is, by far, Canada's largest trading partner. If the US economy declines, Canada's economy declines. The US is also considered a global economic superpower. If the US economy declines, the global economy declines.

The consequences of breaching the US debt limit are dire:

·     US cash flow is impacted as the government is no longer able to issue debt (e.g. T-bills, bonds). Cash dwindles.

·     Government daily contributions are deferred to conserve cash (e.g. employee salaries, veteran benefits, and even contributions to employee pension funds are temporarily halted, and, if needed, Social Security payments). Citizens no longer have cash to survive and the US will descend into a recession.

·     The government won't be able to issue payments to external contractors. Contractors will no longer accept government work and infrastructure won't be maintained adequately.

·     The government will eventually default on debt payments and their global credit rating will drop. In simple terms, this is equivalent to bankruptcy. Borrowing becomes more costly and more difficult. With inflation and rising interest rates, a US debt default would create an economic downward spiral that would have global impacts. Global financial markets will become unstable.

‍The Eternal Optimist.

I think the US will do whatever it can to avoid hitting the debt ceiling in order to preserve the global economy and it's position on the world stage. We'll see...