Debt storm ahead?

Politicians are creating more drama than Hollywood over the federal debt ceiling.

Let’s recap what we know with some educated speculation about what could happen next.

[Scroll down to the bottom for the nitty-gritty if you want to skip the details.]

What is the debt ceiling and why is it in the headlines (again)?

The federal debt ceiling is a limit on how much the U.S. Treasury can borrow to pay government commitments already approved by Congress. 1

Once the ceiling is reached, Congress must either increase or suspend it so the Treasury can issue new debt and raise the money needed to cover its bills.

Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.

Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinkmanship adds anxiety each time it comes up.

What would happen if Washington doesn’t reach a resolution?

Treasury Secretary Janet Yellen has warned that the U.S. could run out of money by June 1 if Congress doesn’t act. 1

While so-called “extraordinary measures” are being used to extend the timeline, if neither side budges, the U.S. could officially default on its sovereign debt for the first time in history.

Even if Congress quickly reversed course, a temporary default could still trigger a market correction and agitate credit markets.

Given how fragile the collective American psyche is about the economy right now, a default could trigger a recession or major job losses as businesses pull back on spending.

The chart below projects unemployment across multiple potential default scenarios that are being discussed. 2

You can see that most of them could result in a spike in unemployment as a default ripples through the economy.

Bottom line: A debt default could be very bad news for global markets and the U.S. economy.

Here’s the potential good news: It doesn’t seem likely that either political party will allow the U.S. to default on its debts.

The price of an impasse is too high; however, it could happen, so let’s be prepared for that eventuality.

What can we do about the debt ceiling showdown?

Not much.

As investors, we’re along for the ride.

Deep breath. We’ll get through this.

Best,

Barry

Sources:

1. https://www.cnbc.com/2023/05/09/debt-ceiling-explained.html
2. https://www.moodysanalytics.com/-/media/article/2023/going-down-the-debt-limit-rabbit-hole.pdf

_____________________________________________________________________________

Boomfish Wealth Group, LLC, DBA Wealth With No Regrets®, is registered as an investment adviser and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. Content should not be viewed as personalized investment type of advice. All investment strategies have the potential for profit or loss. Tax, legal, and estate planning information is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation. Investing involves risk, including the potential loss of principal. Any references to protection benefits generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Neither Boomfish Wealth Group, LLC, nor Wealth With No Regrets® is engaged in the practice of law or accounting. Content prepared by Snappy Kraken. The S&P 500 is an unmanaged composite index considered to be representative of the U.S. stock market in general. All index returns exclude reinvested dividends and interest. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
We are an independent financial services firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. It is important that you do not use this information to request, authorize or effect the purchase or sale of any security, to send fund transfer instructions, or to effect any other transactions. Any such request, orders, or instructions that you send will not be accepted and will not be processed.