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New Year Challenge - USA Debt Limit

As the new year approaches a new challenge arrives in the form of the USA Debt limit. It is the self-imposed debt limit that is passed by Congress. Currently, it stands at $31.4 trillion which was last raised in December 2021 by $2.5 trillion. In November 2022 the debt outstanding increased to $ 31.41 trillion compared to $31.24 in October.

This does technically breach the limit but due to some exceptions, it still has room but not by much as January 2023 arrives. The last time such a situation arrived was in August 2012 causing the debt of the US to be downgraded.

Though it is early for such an outcome given the last time Republicans took over the House post the midterm election win, the same happens in January 2023 when they took over the House again. For now, the government was able to make a deal and pass the $1.7 Trillion spending bill but moving the debt limit will be more tricky.

In 2021, the debt limit increase took many rounds of negotiations and close calls of default. But given the urgency of Covid waves impacting the economy, it still found some leeway and made it through. But currently no such emergency impacts the economy and inflation is the biggest tussle. This might make negotiations even tougher.

The impact of a late deal will be another blow to debt and equity markets, which have already seen a large downside in 2022. But do watch out for the Volatility Index as it rises preemptively with a strong momentum like it did in 2011.


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