What History Tells Us About the Debt Ceiling and the Stock Market

I have been contributing to Nasdaq.com for around ten years now, which not only makes me feel old, but also makes me all too aware of the concept of cyclicality. When things happen in the markets, I can look back over the archive of my work here and find something I wrote about a similar situation. There have been multiple dips and bounces during that time, and many occasions when the commentariat became hyped up about things that, when viewed through the lens of history, were actually not that important.

For example, this morning, on the day after the U.S. Treasury Secretary Janet Yellen informed the nation that we have hit the debt ceiling, I looked back to see what I wrote the last time this fight occurred, and realized that there wasn’t just one occasion. In fact, fights over government debt have been a pretty constant theme over the last ten years. That is in part because the U.S., unlike any other country, has a “debt ceiling,” a pre-set limit to government borrowing that has to be raised and approved periodically. What history has clearly shown is that having such a ceiling doesn’t stop debt from ballooning; it just creates a date each year for political theater and hypocrisy in D.C. to become even more prevalent than usual.

There is a lot of posturing this time too, but nobody ever acknowledges what would have to be done if we actually regarded government debt as a serious problem. You would have to simultaneously raise taxes, which Republicans would never agree to, and cut spending, which Democrats would oppose. Even then, though, history shows that this isn’t even a real divide: Republican Congresses have presided over some massive spending increases while Democrats haven’t stopped the top tax rate falling from 90% in the early 1960s to its current level. Both parties, it seems, are quite happy to borrow to buy votes in some way, knowing that they will probably be dead and gone when that particular piper has to be paid.

The concept of a debt ceiling was presumably a well-intentioned attempt to introduce some accountability, but it has failed miserably, given that the national debt now stands at $31.5 trillion. What it has done instead is create a regular date when the world is forced to call into question the creditworthiness of the United States, thereby raising the specter of a meltdown of the global financial system. That means anyone who has a job or a retirement account would be affected, so lest you think this is just a political fight, it has real ramifications beyond Washington DC. The U.S. dollar is the global reserve currency, but that status comes with responsibilities, and any hint of defaulting is therefore not just irresponsible but also incredibly stupid.

However, there is always a faction that emerges in Congress on one side of the aisle or other for whom neither irresponsibility nor stupidity seems to be a barrier to doing what they think will be to their advantage. At this particular moment, it is a narrow group within the Republican party that is the problem. And it could be a very big one, thanks to the very slim Republican majority in the House of Representatives. When Marjorie Taylor Greene says “I, for one, will not sign a clean bill raising the debt limit," we should all look beyond the obvious fact that it is the President, not a random Georgia Representative, that signs bills into law, but consider whether she and those like her will be stupid enough to actually create doubt around the debt worthiness of their country.

Based on what I’ve seen so far, I’m not sure I want to bet on that group to understand or care about the dangerous implications of their words and actions, nor on them to put grandstanding aside and do what is best for the country -- and even the world -- in a practical way.

Of course, we know how this will likely end. Kevin McCarthy, assuming he doesn’t want to go down in history as the Speaker who presided over the Congress that destroyed the global economy, will eventually side with Democrats to pass a clean bill that raises the debt ceiling. That will hurt his pride and weaken him in almost every possible way, but the alternative, that he side with the extremist wing of his party, is so horrifying that he will have no choice but to turn to the Democrats.

However, that doesn’t mean that there won’t be some chaos along the way. The last ten years have shown that this is inevitable, and that it will spook traders at some point. As before, though, the disruption will likely be temporary, and the national debt will climb again. We have seen it all before and unless we change the character of those we elect, we will see it again.

I guess the only thing it will prove is that, as Hegel once said, “We learn from history that we do not learn from history.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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