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A Memo From Michigan CLASS

The U.S. is once again precariously close to its self-imposed debt ceiling limit. This situation jeopardizes the Government’s ability to meet its financial obligations. As this is a real and concerning matter, the hyperpartisanship in Washington, D.C. continues to exacerbate the issue.

Through extraordinary measures, such as suspending investment in federal retirement funds, the Treasury Department has continued to meet federal obligations. Despite these measures, Treasury Secretary Janet Yellen recently estimated that the Government may run out of funds in early June, the “x-date” when the U.S. can no longer pay its bills. If legislators fail to raise the debt ceiling, the U.S. might default on some of its debts. As we move closer to the x-date without a resolution, the financial markets will be prone to elevated volatility.

While raising the debt ceiling used to be a formality, in recent years, it has become more and more difficult for Congress to agree on the best path to fund the Government. Raising the debt ceiling does not approve new spending; instead, it allows the U.S. to issue more debt to pay the obligations it has already incurred. This is not the first time, however, that the U.S. has fought over the debt ceiling. In 2011, S&P infamously downgraded the U.S. from “AAA” to “AA+” because of the increased partisanship surrounding the debt ceiling. At that time, the U.S. was on a negative credit watch until the Budget Control Act Amendment was passed, which allowed S&P a better view of what debt negotiations would look like moving forward. Should the ceiling not be raised by the x-date, the U.S. would likely have to prioritize debt payments over other spending such as payrolls and social security to stave off the risk of default that would certainly have far-reaching negative effects globally.

Michigan CLASS continues to closely monitor developments in Washington, D.C. and maintains a consistent approach to managing risk while prioritizing the safety of your funds. As in the past, this may prove to be a transitory event, but until then, enhanced due diligence and liquidity remain our primary focus. We will continue to provide further updates as information, policies, and actions arise.