Uncertainty Reigns Amid Debt Ceiling Standoff

Uncertainty Reigns Amid Debt Ceiling Standoff

The 2011 crisis offers clues on how events may unfold.

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Reviewed by: Lisa Barr
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Edited by: Sean Allocca

As President Biden and House Speaker Kevin McCarthy attempt to hammer out an agreement on lifting the debt ceiling, the backdrop for many Americans and the markets is fear and uncertainty. 

“A default on the national debt would be unprecedented, and even getting close to the deadline without a deal to raise the debt ceiling could have consequences for markets,” Joel Dickson, global head of advice methodology at The Vanguard Group Inc., told etf.com in an email. 

While it’s unknown what an outright default may bring, a former debt ceiling battle offers a guide.  

“The most recent proxy we have for the current circumstances is the 2011 debt ceiling crisis, when Congress narrowly increased the ceiling two days prior to expected default,” Matthew Garasic, CFP, founder and president of Unrivaled Wealth Management in Pittsburgh, told eft.com in an email. “The last-second increase resulted in Standard & Poor’s downgrading the U.S. credit rating from AAA to AA+.”  

Dickson added that it’s a “fool’s errand” to try and predict consequences, “because markets are forward-looking, and sharp, sudden price swings both positive and negative can occur as concern waxes and wanes on an almost daily basis.” 

The impact on ETF inflows and outflows also depends on many factors, not the least of which is what the vehicle’s underlying assets are, said Garasic. 

Again, 2011 may offer some clues. “In the 2011 scenario, you would have likely seen equity ETFs experience outflows, while core bond ETFs experienced inflows,” said Garasic. “However, the result could play out differently depending on how investors react, if faced with a similar situation.” 

Should an agreement not be reached by June 1, the due date given by the Department of the Treasury for many federal obligations, millions of Americans would be the first to feel the shortfall, Samantha Sanders, director of government affairs and advocacy at the Economic Policy Institute, told NPR.com. Some of those monthly bills cover Social Security, military and veterans benefits, housing assistance and food stamps.  

In a March 23, 2023 speech to the National Association of Business Executives, Treasury Secretary Janet Yellen noted that a default would “upend the lives of millions of Americans and those around the world.”  

 

Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.