Stansberry Research

The First Rule of the 'Debt Ceiling'

Corey McLaughlinStansberry Digest

Same story, different day... The first rule of the 'debt ceiling'... Ordinary times... $31.4 trillion and counting... The only thing you need to know about this... The biggest gang in the world... Make money from this noise...


Again? Really?

If you didn't see the following CBS News headline the other day, you surely saw something similar...

With U.S. hitting debt ceiling, 'extraordinary measures' being used to prevent possible default

Again.

I (Corey McLaughlin) could make my job a lot easier today and simply dust off our reports from the last time the U.S. government's "debt ceiling" became mainstream news. Specifically, this August 2, 2021 Digest is still relevant and reaches the same conclusion I do today...

I won't go so far as to do a total copy-and-paste job. But the debt ceiling, or limit, is once again making headlines as the U.S. Treasury Department hit its congressionally approved spending limit of $31.4 trillion last Thursday. Technically, this would mean the U.S. can no longer pay its bills, placing it in default.

So I feel compelled to ease some minds again, or rankle them.

Here goes. Like we said in another 2021 Digest from that September...

Specifically, we're referring to the ongoing debate – or, more precisely, the game of "political football" – that is the federal debt ceiling... It is essentially the U.S. government's congressionally approved spending limit, which needs to get approved soon.

Congress plays dangerously close to the deadline almost every time it comes around. Then it uses our debt for political gain, soundbites, maybe a few votes... Then Democrats or Republicans eventually, and quietly, agree on the same big thing.

More spending. No matter the party or affiliation. It's almost like the famous first rule of the Brad Pitt movie Fight Club. The first rule of the debt ceiling? There is no debt ceiling.

Technically, the debt ceiling is the congressionally approved limit on the amount of debt the Treasury Department can rack up. It's not "spending," per se, but more like a credit limit for the U.S. government for spending that Congress has already approved...

But this limit – a vehicle that originally began to help fund World War I – is set by the same body that approves the federal budget and appropriates funds.

It's like the chicken-or-the-egg dilemma. Which came first? It doesn't really matter... The end result of the arrangement is the same: more chickens and eggs. More spending and debt.

In December 2021, Congress raised the federal government's overall borrowing limit by $2.5 trillion. The federal budget deficit for fiscal year 2022 was more than $1.3 trillion, and the 2023 deficit is projected to be about $1.2 trillion. This adds up to... $2.5 trillion.

You don't see a dollar spared or saved by Uncle Sam. And now the Treasury has maxed out its credit again, and it wants more.

The 'extraordinary' is actually quite ordinary...

The debt ceiling has been raised by Congress roughly 90 times since 1940, including about 20 times since 2001. That's long enough of a track record to cover the spectrum of those who've been in political power. As we wrote in a June 24, 2021 Digest...

More debt leading to more debt has been the practical answer that people of various political views have seemed to agree on over the years.

What's more, the "extraordinary measures" that Treasury Secretary Janet Yellen cited as being used at the moment to allow the U.S. to pay its bills – such as suspending reinvestments in federal employees' retirement plans – were used less than two years ago, the last time Congress tossed around this political football...

If you do this every couple of years, that's far from "extraordinary." The recent announcement from Yellen reads like a form letter close to what she said in 2021, with the language mostly the same and only a few dates, numbers, and tiny details changed under the same letterhead.

 In short, it's a lot of noise, especially for now...

Even Yellen admitted the U.S. government can pay its financial obligations until June without an increase in the congressionally approved debt limit. So, carry on...

But worse than the mostly needless, anxiety-provoking headlines, though, might be the "debate" in the halls of Washington and in the media about the U.S. debt. Here's a Google search today for "debt limit"...

This sampling – served up to me by the content gatekeepers at Google – represents enough angles of the story. Hypocrisy... a mess... Democrats blaming Republicans... Republicans blaming Democrats...

And it's a waste of time, distracting from the real story and impact on the economy and markets... The government loves spending, and we all pay for the problems that come with that... like inflation, an ever-widening "wealth gap," and government waste.

Here's all you need to know about the 'debt limit'...

It will most likely go higher... another few trillion dollars when all is said and done later this year. Place your bets. This means no U.S. debt default, but the same problems for all of us.

The most concerning part of this entire story is that ratio of U.S. debt to gross domestic product ("GDP") is around 120%, meaning the country currently has more debt than economic production.

We'd like that to change, though it doesn't mean it will.

But here's the big secret...

The government won't really default...

I won't ever say there's "zero risk" of the U.S. defaulting on its debt. There's always some risk of just about any outcome. There's a risk I won't survive another day on Earth. More practically, though, there's an acceptable level of risk that I'm willing to take on for the potential rewards of investing in the markets to protect and grow wealth.

Furthermore, as much as it might sound like some politician is serious about pausing or even reducing our nation's debt, they're not... or won't be when the rubber hits the road. And as much as we know these same folks are incapable of working together as a group in the best interests of "We the People," I don't think they will bring on a financial crisis – at least, not by way of not increasing the debt limit...

At the very least, such a thing would call into question the viability of their own paychecks... and the value of nearly everything that they own. One of our editors described this situation in a different way in a private conversation recently...

He told a story about his grandfather, who was a teenager when he got his first job driving "connected guys" from New York City to Atlantic City. What did his grandfather learn about being so close to the Mafia?

The biggest gang in the world is the U.S. government. They control all the money and the weapons.

This much is still true. You'd have to be a world-class idiot to want to give that up voluntarily.

Never say never, but for now, it's unlikely...

The dollar remains the world's reserve currency, and the Fed can keep printing dollars. (And U.S. military might is unmatched, too.)

That gives you an opportunity to make money off this noise...

Even if you don't believe me and think the U.S. will default on its debts, Yellen says it won't happen until at least June... Until then, you can still buy short-duration Treasurys without losing sleep. A three-month T-bill is paying 4.6% annualized today.

Also, prepare for an economy where the debt keeps going up and up... Practically, in a higher-interest-rate world, there might be a bunch of other consequences to more spending and more "expensive" dollars...

Turning to stocks, my biggest short-term concern involves an "earnings recession" as companies begin to report their fourth-quarter financials en masse this month... and top executives start to talk about their outlooks for 2023.

I'll listen more to that in the weeks ahead than politicians making threatening comments about the debt limit. We know where that is most likely headed. Up. Again. For almost the 100th time in less than 100 years.

The Fed Is About to 'Run Over a Cliff'

In this episode of Making Money With Matt McCall, former hedge-fund manager and fellow podcaster Hugh Hendry details why he believes the market has lower to go... and it has to do with the Federal Reserve...

Click here to watch this episode right now. And to catch all of the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 1/20/23): Aehr Test Systems (AEHR), Alamos Gold (AGI), iShares MSCI Mexico Fund (EWW), Fluence Energy (FLNC), Novo Nordisk (NVO), Flutter Entertainment (PDYPY), and Revance Therapeutics (RVNC).

In today's mailbag, some more thoughts on Dave Lashmet's Thursday Digest... As always, send your comments and questions to [email protected].

"Dear Mr. Lashmet, A truly great article on Musk and Starlink!" – Paid-up subscriber Steven T.

All the best,

Corey McLaughlin
Baltimore, Maryland
January 23, 2023