What is the Debt Ceiling and Why Should You Care?
What is the Debt Ceiling and Why Should You Care?
Right now the U.S. Government is debating the debt ceiling and it’s a big deal if you are an investor.
What is it and why is it important?
That’s what we are going to cover in today’s live!
The Debt Ceiling is the highest amount of credit that the U.S. Department of Treasury can issue.
When the government budget requirements for spending exceed the amount of money the government has in tax revenues and in available credit, it must raise the debt ceiling or not be able to pay for all of the approved spending.
The House of Representatives and the Senate both have to approve an increase in the debt ceiling.
When there was a Democratic President and a Republican Majority House of Representatives in Obama’s administration there was a debt ceiling crisis. There is another one now with Democratic President Biden and the Republican Majority House of Representatives.
So if the debt ceiling does not get raised the Federal Government will have to work with Treasury to determine what to pay for with the money that they actually do have available. These include new spending measures, current salaries for government workers, pensions, unemployment insurance, social security, medicare, military personal, veteran’s benefits, and anything else funded by the federal government.
It also includes paying interest on government treasury bonds outstanding. If the U.S. government stops paying interest then it’s credit rating will be downgraded. The cost of borrowing funds in the future will go up as it will be more risky to lend money to the U.S. Government.
Another outcome would be that the stock market will probably decline or crash. CLICK HERE for an article from the White House on possible consequences of not raising the debt ceiling. The article already notes that the cost of insurance in US credit swaps and the interest rates for short term treasuries have already increased as we near the date – June 1 – that the U.S. Treasury said they will start being at risk of not having the funds to pay for all their obligations.
This all being said, the last time there was a debt ceiling crisis in January of 2013 I was completely oblivious to what it would mean. I survived and my long term goals of accumulating wealth were not really affected in any way that I can tell.
Now that I have an idea, what can I as a single ordinary American citizen do if the Republicans want to use the debt ceiling to negotiate with the President on changing spending on an already passed budget?
Honestly, I’ve seen various reactions from other investors. Some say to be in cash ready to pounce if the market tanks from a stalled agreement on the debt ceiling. There will be great investments that will be cheap to get.
Others say to get into real estate so that if there is inflation due to the crash you can increase rents and be shielded from the effects. They are suggesting real estate funds in foreign countries.
Some are positioning to buy real estate as an increase in home loan interest rates would drive down housing prices even more.
Some are saying to pull your money out of stocks and put them in long term U.S. treasury bonds or municipal bonds.
Some say stick to your current plan because trying to time the market will not be helpful to your portfolio or your peace of mind.
And that is my recap of this upcoming possible debt ceiling crisis. Add to the discussion with a comment below!