Should I be worried about the debt ceiling fight?

When the U.S. government spends more than it earns through taxes and other revenue sources, it makes up the difference by borrowing money. However, U.S. law establishes a limit, known as the debt ceiling, to how much the U.S. government can borrow. That ceiling is, as of the time of this writing, set at $31.4 trillion, an amount the U.S. government hit on January 19, 2023.

Until the U.S. Congress authorizes a higher debt ceiling, the U.S. can no longer borrow money to cover expenses. For a while, the U.S. Department of the Treasury will be able to continue paying bills through various “extraordinary measures,” but those measures won’t work indefinitely. In a letter to congressional leaders, Treasury Secretary Janet Yellen indicated that the U.S. would be at risk of default by June.

Default wouldn’t be quite as novel an outcome as many describe. The U.S. has defaulted on its debts (to varying degrees) several times in its history.

That said, no one is exactly sure what will happen this time. Most predictions are dire, given that the U.S. is the nexus of the global economy. Judging the situation by news headlines isn’t helpful, however, because the media is incentivized to loudly proclaim imminent doom, which are more likely to get clicks than calmer assessments.

One thing is clear: uncertainty around the situation could increase volatility in financial markets. Moody’s Investors Service wrote in a recent report, “Given an extremely fractious political environment, we anticipate an agreement will likely only be reached very late or in an incremental fashion, potentially contributing to flare-ups in financial market volatility.”

So, should we as investors be worried about this situation?

I’m not. This issue arises at regular intervals (78 times since 1960). It’s often politically weaponized and used in interparty fights. It generates a lot of political grandstanding and overblown news headlines. Then it passes. I don’t have a crystal ball into how this year’s debt limit fight will evolve, but I am skeptical that it will have much impact from a long-term investment standpoint.

To adapt something that I wrote in my end-of-year letter to clients: Successful companies are going to operate in a lot of different political and economic environments throughout their lifecycles. Instead of worrying about external factors like who controls Congress, what interest rates are, whether the U.S. government is going to default, etc., investors should focus on things like the durability of cash flows in the businesses they own. If those cash flows are protected, sustainable, and poised to grow over time, those investments will do well. The businesses will be able to weather downturns and thrive in upswings and slowly generate the value we expect, regardless of what the U.S. government is doing or what the momentary economic situation is.

As investors, it’s both easier and more meaningful to focus on knowable variables and to make assessments based on those. I am more concerned with day-to-day, ground-level decisions happening within a company than I am with the political environment within which that company is operating. Focusing on buying solid businesses at good prices is far more likely to carry me into a successful, prosperous future than worrying about the debt ceiling fight or trying to somehow game it for monetary benefit.