What if We Don’t Raise the Debt Ceiling?
Updated: May 26, 2022
The news media, in its coverage of the Congressional debate over raising the debt ceiling, has alarmed its readers and viewers with terms like “government default” and “global financial crisis.” But if there is a government shutdown looming in our future, what is the most likely outcome for investors?
There are several reasons to wonder whether the current debt is as alarming as the numbers look in isolation. First, interest rates are so low that the government isn’t paying much for the privilege of borrowing investors’ dollars. And is it so terrible that the government is making secure bond investments available to the public (and its in-house agencies)?
But what if we DO have a government shutdown next month? What would be the consequences?
One would be the suspension of Social Security checks—which might not be the ideal political message for recalcitrant Republican Senators and Representatives to send to their retired voters. Nonessential government agencies would be shut down, including National Parks and the economists who collect government statistics. Government employees would be furloughed.
But if we look at past shutdowns, they are all temporary blips, soon forgotten. The debt fiascos of 2011, 2013 and 2018 were all resolved, and everybody was made whole; there is not going to be a permanent wholesale default on government obligations this time around either. And most meaningfully, none of the past exercises in brinksmanship impacted long-term equity returns; indeed, the S&P 500 rose during the 2018 shutdown.
So, the biggest danger is short-term: that the alarming media coverage might spook timers and traders, who could go on a short-term selling rampage before realizing that the government taking a week or two off didn’t really depress actual underlying value of U.S. companies. And, of course, an actual shutdown is unlikely in the first place. The games Congress is playing is looking like a terrific example of much ado about nothing.
If this does not help put you at ease, please feel free to contact Novi to discuss any questions or concerns you may have related to this or any other personal planning or investing matter.