Articles | April 5, 2023

The Debt Ceiling: What History Tells Us

On January 19, 2023, the U.S. hit its $31.4 trillion debt limit, setting off a battle between Democrats and Republicans in Congress to negotiate raising the limit once again. President Joe Biden and Democrats originally said that the debt ceiling increase should pass with no conditions, while Republicans say that the debt ceiling limit increase must be accompanied by an array of spending cuts.

If the two sides don’t agree in time, the U.S. could face default on its debt.

The Debt Ceiling What History Tells Us

In the past, every time this problem reared its head, an agreement was finally reached in Congress and a default-related crisis was averted. However, this time around, some are worried about the consequences of the current deep political divisions in Congress.

What will another debt ceiling showdown mean for the economy and markets this time? We can look to an incident in recent history for guidance.

What is the debt ceiling?

America’s debt ceiling is a borrowing cap that Congress sets for the nation. It was enacted in 1917 as a way to give the Treasury more flexibility in borrowing. Prior to that, Congress had to authorize each piece of debt in separate legislation. Congress created the first aggregate debt limit that covered almost all government debt in 1939.

Since the end of World War II, Congress has raised the debt ceiling more than 100 times. But since then, the national debt has surged. With the large amount of debt, and with more polarized political parties in Congress, the topic of raising the debt ceiling has become a much more fraught political issue in recent years.

U.S. Federal Debt Has Increased Dramatically Since the Great Financial Crisis

This graph shows the U.S. federal debt as a line that has grown from nearly $321 billion on January 1, 1966 to more than $31 trillion as of October 1, 2022. The graph also shows five recession years during this period. Growth in the federal debt started to accelerate during the 1990–1991 recession and has increased sharply since the Great Recession of 2007–2009.

Shaded areas indicate U.S. recessions.

Source: U.S. Department of the Treasury. Fiscal Service, Federal Debt: Total Public Debt [GFDEBTN], retrieved from FRED, Federal Reserve Bank of St. Louis; March 22, 2023.

Extraordinary measures

Once the debt ceiling is breached, the Treasury does not default on its debts immediately. Instead, the Treasury can use so-called “extraordinary measures” to continue to pay its bills until an agreement to lift the debt ceiling further is reached in Congress. Treasury Secretary Janet Yellen says the Treasury is using those measures now and that she anticipates that they could float the economy until June or early July, if Congress doesn’t reach a deal to raise the ceiling before then.

Other, more far-fetched suggested tactics have been dismissed, such as the U.S. Federal Reserve stepping in to buy defaulted Treasuries or the Treasury issuing a trillion-dollar coin to help pay the country’s bills.

Regardless, if Congress doesn’t raise the debt ceiling after the extraordinary measures have been exhausted, the Treasury will default. In this case, the term “default” does not mean that Treasuries go to zero; instead, it means that the Treasury will no longer pay interest payments on its debt.

What if there is a default? A flashback to 2011

What if there is no agreement in Congress and the country defaults on its debt? No one knows exactly how it would play out, but it would likely be quite undesirable for both the economy and markets. Let’s look at a real-life example: what happened in 2011, the last time we came to the brink.

There have been several debt-ceiling battles in Congress over the past decades, but the closest the U.S. government has come to actually defaulting was in 2011. Back then, “Tea Party” Republicans led the way in demanding that President Barack Obama negotiate over deficit reduction in exchange for an increase to the debt ceiling. Markets were in turmoil during the summer of 2011, the months leading up to a potential default, before an 11th-hour agreement was finally reached in early August. The S&P 500® fell -16 percent that summer and finished the year in the red, as shown on the following graph.

S&P 500® Performance June 30, 2011 to December 31, 2011

This line graph illustrates volatility in the performance of the S&P 500® Index. Over this six-month period the high was 2.5% on July 7. The low was -16.3% on October 3. At the beginning of this period, the return was zero, and at the end of the period it was -3.7%.

Source: FactSet

The S&P 500® Index is a product of S&P Dow Jones Indices, LLC and/or its affiliates (collectively, “S&P Dow Jones”) and has been licensed for use by Segal Marco Advisors. ©2023 S&P Dow Jones Indices, LLC a division of S&P Global Inc. and/or its affiliates. All rights reserved. Please see for additional information about trademarks and limitations of liability.

Both growth and value stocks tumbled that summer, as did small caps and high-yield credit. Crude oil also sank.

Performance of Various Indices June 1 2011 to September 30 2011

This bar graph compares returns for the following indices and crude oil: S&P 500, Russell 1000 Growth, Russell 1000 Value, Russell 2000 and Bloomberg High Yield. For all, returns were negative, ranging from -7.0 percent for Bloomberg High Yield to -21.2% for the Russell 2000.

Source: FactSet

The S&P 500® Index is a product of S&P Dow Jones Indices, LLC and/or its affiliates (collectively, “S&P Dow Jones”) and has been licensed for use by Segal Marco Advisors. ©2023 S&P Dow Jones Indices, LLC a division of S&P Global Inc. and/or its affiliates. All rights reserved. Please see for additional information about trademarks and limitations of liability.

Meanwhile, the next graph illustrates, the 10-year Treasury yield tumbled from 3.65 percent early in 2011 to below 2 percent in September 2011, as investors realized the amount of economic risk at stake. It took until early 2013 for the 10-year yield to reach 2 percent again.

10-Year Treasury Yield January 1, 2011 to March 31, 2013

This line graph illustrates volatility in the 10-year Treasury yield, which was 3.3% at the beginning of the period and 1.9% at the end. The high was nearly 3.7% in February 2010, and the low was nearly 1.5% on both June 1, 2012 and July 20, 2012.

Source: FactSet

While Treasury rates sank during that time, mortgage rates and consumer credit rates climbed higher, putting a drag on consumer wealth. Household consumption fell by $2.4 trillion from the second to the third quarter of 2011.

After the debt ceiling crisis in 2011 was resolved, Standard and Poor’s downgraded U.S. Treasury debt from AAA to AA+, meaning one of the country’s top ratings firms felt that U.S. debt did not meet requirements as the world’s safest investments. At that time, S&P said that the deal struck to end the crisis did not go far enough to address the poor outlook for the country’s financial profile. In addition, S&P put the rating on “negative outlook”, meaning it was unlikely to move higher in the short term.

Default is still unlikely, but the situation is uncertain

The political conditions that produced 2011’s near-default situation are similar to the ones we have now. However, the current political environment is even more polarized than it was back then, and thus many are worried that the country could be in for a similarly high level of brinksmanship that may go down to the wire before the debt ceiling matter is resolved.

Even if a default is avoided, credit rating agencies are watching the situation to see if it will warrant downgrades of Treasury debt. Fitch, which still maintains a perfect credit rating for U.S. Treasury debt, is “more concerned this time around” according to its global head of sovereign ratings due to “repeated episodes” of debt ceiling brinksmanship which diminishes the U.S. dollar’s position as the global reserve currency and investors’ view of U.S. Treasuries as a risk-free asset.

An actual default on Treasury debt would have disastrous consequences and it is difficult to see Congress allowing it to happen. In early March, President Biden rolled out a deficit reduction proposal of over $2 trillion for the next 10 years in an effort to come to an agreement with Congress.

But even a close call will likely cause volatility for markets and may sting the economy in the short term. It is one more factor that could lead to continued volatility for markets in 2023.

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The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. On all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.

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