Market Observations

The Debt Ceiling: The Other Nuclear Threat

Market Observations White Paper
February 2023

Authors & Contributors

With extraordinary measures in play, the Treasury gains almost six months of issuance before it no longer has sufficient funds in its account at its fiscal agent, the Federal Reserve (Fed). This is the crunch because the Federal Reserve Act forbids the Fed from lending directly to the Treasury. 

The US has never defaulted because of Congress’ failure to raise the debt ceiling. However, the British invasion of Washington during the War of 1812, the revocation of the gold clause by Franklin Roosevelt, and a technical glitch in the early 1970s triggered defaults. Despite the coming histrionics, the nation has never hit the drop-dead date of running out of cash while the debt ceiling binds, presumably because the stakes associated with failure are so high. Expect the same, but this episode may be closely run and uncomfortable. The unfortunate analogy is the threat of a nuclear weapon.