It”™s come down to the wire ”“ as it usually does ”“ when the divided executive and legislative branches of the federal government square off on the eternally pesky debt ceiling crisis. In a nutshell, the Republicans want to raise the debt ceiling while ensuring spending cuts, which for them means curtailing entitlements. Indeed, the Republicans have squeaked by such a debt ceiling bill in the House of Representatives that has no chance of passing in the Democratic Senate. That”™s because the Democrats, led by President Joe Biden, don”™t want any discussion of spending cuts, particularly to entitlements, tied to the debt ceiling negotiations.
The on-again, off-again talks are back on, and Wall Street is taking them in stride ”“ for now. A debt default by the United States ”“ whose “risk-free” Treasury bonds are the backbone of the world financial system — could be a calamity for global markets, affecting everything, including the U.S.”™ ability to borrow money, pay government workers, send out disability and Social Security checks and make Medicare and Medicaid payments. It could throw the country, still struggling with inflation though doing better than the rest of the world, into a recession.
But what exactly is the debt ceiling and why do we have to raise it continually? We turned for some answers to Westfair contributor Tim Baker, CFA, founding CEO of Metric Financial, an investment and financial planning firm in Simsbury, Connecticut:
Tim, I don”™t think some people understand that the debt ceiling involves current not future spending. What exactly is it?
“The debt ceiling is the limit placed on the U.S. Treasury regarding how much debt it can issue to fund the budget. Right now, it stands around $31.4 trillion. It poses a problem because once that limit is reached, the government needs to start spending cash and could run out. Current estimates are that could happen by June 1.”
”¯So what, if anything, can people do to protect themselves from a potential default?
“There is very little you can do about it. Moving to cash is, of course, an option. But the government running out of money could have an effect on the banking system as well. We just don”™t know how widespread the ramifications would be if the U.S. Treasury ran out of money for a sustained period of time.
“While we don”™t make predictions and believe anything can happen, we are of the opinion that this will get resolved, hopefully sooner rather than later. Because we believe that, we also encourage investors to focus on long-term goals and invest that way, rather than making tactical moves based on what could be a short-term situation.
“We”™ve been here before and we will likely be here again. In the meantime, focus on what you can control ”“ how and where your investments are allocated to ensure your goals are met with the proper balance of risk and potential growth.”¯
“At Metric, we believe strongly in the power of stocks for growth and beating inflation with the understanding that they can be volatile during periods of stress like we”™ve seen over the last year and a half. The real driver of stock returns is long-term earnings growth, which can be overlooked when there is short-term noise.”
”¯Why not just raise the debt on future spending so we don”™t have put ourselves through this political and psychological wringer every so often?
“This is an interesting question. Until World War I, every time the federal government issued debt, it had to be approved by the president and Congress. President Woodrow Wilson (served 1913-21) and Congress got rid of that rule and created an overall limit, hence the debt ceiling. Congress can suspend the debt ceiling or allow the Treasury to exceed it, but that has been rare.
“So while raising the debt ceiling only addresses past spending choices and we could certainly use a better solution going forward, having a debt ceiling actually gives the government greater flexibility than the original program of approving every single debt issuance. To address future spending, it becomes more about just that ”“ addressing the imbalances in our spending and borrowing so that we don”™t have to contend constantly with raising the ceiling.”
For more on Metric Financial, call 860-256-5895 or visit metricfin.com.
