Should you worry about the US defaulting?
We are constantly faced with distractions, something trying to get us off our game.
Especially when it comes to investing.
And then there is theater:
The U.S. government funds much of its spending through debt, which is issued by the Treasury.
From the Treasury’s website:
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
The current debt limit is $31.4 trillion, which we reached last week.
Now it’s time for the Treasury Department to take “extraordinary measures” to buy us some time to figure out a compromise.
Think of this as you transferring your credit card balance into another account to get that 0% interest. We just need a little bit more time…
The Treasury has indicated that the short-term moves will allow the government to pay their obligations until summer time (June-August).
Should we not have a deal in place by then, prepare for a frenzy of headlines that are worrisome to those who depend on government payments, including Social Security and Medicare.
Republicans have already stated that they will not raise the limit and Democrats don’t seem willing to negotiate.
Good start!
It shouldn’t surprise us that we find ourselves in this position again.
The last time there we generated a surplus was 2001:
Source
But does it matter? How does this affect you?
Yes, this has been and will be a lingering issue for some time. We love to spend.
But since the end of the WWII, the government has adjusted the debt ceiling over 100 times…
Should you sell everything in anticipation of the US defaulting on their debts?
I don’t believe so.
During periods of a divided Congress, debt and spending debates are more heated but inevitably, the debt ceiling will be raised.
No politician wants to put their name on something that prevents people from getting their social security checks or Medicare reimbursements—or cuts in defense spending for that matter.
Remember, in 2011 we found ourselves in a similar situation.
We were dealing with another debt ceiling crisis and then Standard & Poor’s, the credit rating agency, downgraded the United States credit rating.
This rattled the markets and the S&P 500 index fell approximately 19% intra-year before finishing the year flat.
People were scared because we were still fresh off the great financial crisis, “I just lost everything, now we have to deal with this shit??”
Josh Brown noted in a 2013 blog that putting money into the markets around the 2011 credit downgrade turned out to be a great move. Two years after this event, the S&P 500 was up 37% (not including dividends).
Sure, we could certainly see another credit agency downgrade the U.S. credit rating and drive a bout of market volatility as in 2011. Interest rates could rise on other types of debt such as mortgages and car loans. A slow down in government spending would result in a slow down in the overall economy.
Nevertheless, we have been here before. Cooler heads will prevail and over time, fundamentals will take over again—economic growth should return, earnings, interest rates and inflation will all normalize and markets will move forward.
Those that are able to stick to their plan, stay rational, and control what they can control - will be rewarded.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.