The US debt ceiling has been getting some serious attention in recent weeks, and if both Republicans and Democrats don’t make a deal soon, we’ll be hearing a lot more about it, to say the least.

So what is the US debt ceiling, and what happens when the ceiling is close to being reached?

US debt ceiling 101…

Also known as the statutory debt limit, is a legislative limit set by the United States Congress on the amount of debt that the U.S. Department of the Treasury can issue to fund the government's operations and obligations. It represents the maximum amount of debt the US federal government is allowed to accumulate.

When the debt ceiling is reached or close to being reached, the Treasury Department must take measures to avoid defaulting on its obligations. These measures, known as "extraordinary measures," can include suspending certain investments in federal employee retirement funds or redeeming existing debt holdings. However, if these measures are exhausted and the debt ceiling is not raised, the United States could potentially default on its financial obligations, which could have severe economic consequences.

It's important to note that the debt ceiling is not a control on future spending but rather a limit on the government's ability to finance the spending already approved by Congress. The level of the debt ceiling is determined through the legislative process, and Congress has the authority to raise or lower it.

In previous years, both sides of politics have, mostly reluctantly (and in the eleventh hour), come together to reach an agreement to raise the debt ceiling before Treasury has needed to take such drastic action (the US has never defaulted on its obligations). But of course there is always a first for everything, which is what makes each debt ceiling negotiations such a sensitive, dangerous affair, particularly when the politics of the day is so hostile and polarised.

At the time of writing, estimates are that the US will reach its limit as early as June 1st, and in the absence of an agreement, will be unable to ‘pay its bills’, potentially leading to debt default. While the consequences of a temporary disruption and default are largely unknown, the general consensus is that such an outcome would be ‘catastrophic’, leading to higher interest rates and even a rush on bank deposits. And while the US President does have some constitutional ‘latitude’ to remedy the situation, the blow to US credibility and global stability, would likely take years to repair.

If you’re unsure about your portfolio, super, or retirement nest egg, its important to seek financial advice sooner rather than later, to consider your personal exposure to a potentially volatile market event.

Rick Maggi, Westmount Financial