Episode 87

MARCH 29, 2023

Doug on the debt ceiling

Doug Clark, Managing Director, Portfolio Manager, Insurance at SLC Management, discusses the debt ceiling and how political posturing could impact markets.

Steve Peacher: Hi everybody. Steve Peacher, President of SLC Management. Thanks for dialing into this episode of “Three in Five” and today I'm joined by Doug Clark, who's a senior portfolio manager on our insurance area within SLC Fixed Income. Doug, thanks for taking a few minutes today.

Doug Clark: Thanks for having me.

Steve Peacher: So, we want to talk about a topic that as we were just talking about before we recorded this, we could spend hours on this. But we've only got 5 minutes, but and the topic is the debt ceiling. Why does it matter and what are implications for fixed income? So, this is something that comes up on everybody's radar every now and then, and it creates a lot of angst. So, let me throw some questions at you about this. So, let's just start with what is the debt ceiling and why does it matter?

Doug Clark: The debt ceiling or debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations. So, borrowing to pay for things like Social Security, Medicare benefits, Federal military salaries, payments on the National debt, etc. When the discussion comes up, many people assume that, you know, the talk around raising the debt limit would actually authorize new spending. And, however that is not the case, it simply allows the Government to finance its existing legal obligations that both Congress and past Presidents have already made. Now, why this matters is that as of January 19th, the U.S. has reached the current debt ceiling of $31.4 trillion dollars. And the Treasury is now moved to execute temporary accounting maneuvers known as extraordinary measures to conserve cash, the delay defaulting on its obligations. The date at which the government hits the debt ceiling and then exhausts those options it's known as your ‘X date,’ and that's the point at which the Government can no longer meet its obligations in full and on time. So, basically constituting a technical default. The X date right now is estimated to happen sometime between July and September this year with the exact timing dependent on how tax receipts come in in the coming months. So, why it's important, you know we're currently in the countdown phase, and the concern here is given the intense political divide we have in Congress reaching an agreement will likely come down to the wire again this year with some pretty serious repercussions if they fail to do so.

Steve Peacher: You know, a term like the debt ceiling sounds a bit esoteric, I suppose. But if we ever I guess, break through it, or don't address this, there are massive market implications. So what are the market implications from your point of view of not passing the ceiling?

Doug Clark: Well, this is where we could spend a lot of time talking. The idea of not raising the debt limit is pretty much unthinkable. Given that it has never happened before the real consequences remain unknown. Congress has always acted to raise the limit when called upon, and it's done so 78 times since the 1960’s alone, so only in 2011 did negotiations reach the brink of the X date before resolving. And despite both sides coming to terms, the reaction was negative and resulted in a credit downgrade of the U.S. Government by S&P from AAA to AA plus. Given where we stand today, with the debt ceiling stalemate between the parties, like I said, it will likely come down to the wire again, but this time around the scenario could lead to either another downgrade or even worse, a possible default. This is especially precarious given the volatility we're seeing in the current markets with the ongoing inflation fight that's taking place, as well as the most recent bank failures we've had.

Steve Peacher: One question I think is logical to ask is why does this come up, you know every seem like it comes up every few years. Why is it so difficult? And why is it so difficult to resolve for a politicians?

Doug Clark: Well, I mean unfortunately, our government consistently runs at a deficit, and they've lived off of borrowing money for a long time, having only posted a budget surplus 5 times over the course of the last 50 years. The growth in the deficit is also accelerated substantially, especially under the past 3 administrations, along with the massive spending taken on due to the pandemic. So, despite this not being about new spending, but being paying for past decisions, both parties have always used the angst and the emergency of raising the limit for political leverage. As always politicians never let a good crisis go to waste, and they tend to use it as a very vocal speaking point. Without the long-term deficit reform or abolishing the limit altogether this will continue to be an ongoing problem that occurs. you know, for the markets every year or two. There is good reason to ask, why do we even have a debt ceiling? Well, the benefit of having one is that it keeps the deficit top of mind on a regular basis. However, where we stand today, it would be in our best interest to raise the limit to prevent a self-induced crisis at this point. And then we can look to address the deficit without the financial markets hanging in the balance.

Steve Peacher: Well, this becomes such a big issue as politicians take it to the brink and as you mentioned as they have in in recent past. The underlying issue is really the biggest issue which is the deficits we run. The fact that our debt is now over $30 trillion. And where's that going to go? My personal view is this is one of the biggest issues we face as a country. So we face the symptom which is the ddebteath ceiling issue every few years. But the underlying issue is even bigger than that and harder to resolve so…

Doug Clark: It has a lot to do with being divided in the sense that 50% of the country you know wants to continue to see increase benefits and the other side of the of the equation is the other side wants limited taxation, so you have more debt and less paying into it is what it comes down to.

Steve Peacher: Well what we may do is pick up this topic, just the issue of the size of the Federal debt and the trajectory on another “Three in Five.” Well, listen let me let me in on a personal note, having under nothing to do with the debt ceiling. I know like me you're a huge college football fan, and you've got a big tailgate going at all of the University of Washington Husky football games. And you and you've also traveled around. And so what I wanted to ask you was, when you think about some of the, you can see some crazy tailgates out there, what are some of the things that come to mind when you think of some of the tailgate arrangements that you've seen in your days being at college football games?

Doug Clark: Yeah, we've been to quite a few tailgates across the country. I mean, we think that Washington does a pretty good job, but you know there are some places like LSU that we've been to that, you know throw a one heck of a tailgate with huge amounts of people as well as large vehicles they've customized and done. The one thing that's interesting about Washington is that we do have the sail-gating that is very close, and a lot of people, you know, have a great time on the water there. It's very unique to our college in that you can dock right behind the stadium, and gives it a whole different aspect to tailgating.

Steve Peacher: Well, that sounds good to me. Sail-gating, that's a that's a term I hadn't heard of before. That's pretty good. Well, listen, Doug thanks for taking the time, and thanks to everyone for listening to this episode of “Three in Five.”


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