Political brinksmanship is back in full force, thanks to the U.S. debt ceiling. While most observers expect some sort of deal (or series of deals) that will allow the Treasury to avoid a default, missteps are possible. While it’s anyone’s guess how the details of such an event would unfold, it poses multiple risks to economies and investors. What is the debt ceiling? The U.S. debt ceiling, which dates back to legislation passed in 1917, sets a Congressionally-determined limit on the total amount of federal debt outstanding. When the U.S. Treasury’s outstanding debt approaches the current limit, it requires Congress to raise that limit in order to clear space for further debt issuance. In recent decades, what used to be a fairly mechanical exercise has become a convenient negotiating lever if not an outright political cudgel. Why is it a concern? While past debt ceiling episodes have ultimately been resolved, the 21st century-habit of taking them down to the wire creates unwelcome uncertainty, not just for the U.S. Treasury market but for financial markets in general, as well as economic agents that depend on payments from the federal government, such as pensioners and contractors. The actual “x date” for running into the debt ceiling is always hard to pin down, as the Treasury is able to take certain steps to postpone the day of reckoning, and quarterly tax collections can help replenish the government’s available funds. Unfortunately, federal tax collections were disappointing in April 2023. This was attributable in large part to the fact that taxpayers in California have until October 2023 to pay remaining liabilities from 2022 and the first three quarters of 2023 as a result of federal weather-related disaster declarations.1 Treasury Secretary Janet Yellen has warned that the U.S. could begin missing financial obligations in early June, while prevailing consensus holds that the x date could occur sometime between then and late summer. President Biden, House Speaker McCarthy and other Congressional leaders have begun to discuss a resolution to the impasse. While there’s some uncertainty around how a default would be managed. There’s no denying that it would have significant and potentially severe effects. These range from missed payments to Social Security beneficiaries, Medicare providers, military service members and other federal employees, contractors, etc. to missed interest and principal payments to holders of Treasury securities. There’s also some disagreement over how quickly the most negative effects might take hold. There is near-universal agreement that a default would constitute a severe policy error (perhaps all the more so because, unlike a typical government