Until Debt Tear Us Apart

Key Takeaways The debt ceiling is the amount of money Congress has authorized the government to borrow. The ceiling has been raised 78 times since 1960. It’s not clear how the current debt ceiling fight will be resolved or how it will impact investors. Regardless, a diversified, personalized mix of investments and a long-term horizon are likely to be the best tools to ride out uncertainty. Rather than asking: Will Congress allow the borrowing of more debt? A better question might be: Can We Afford the National Debt?

If ongoing debate over the debt ceiling is giving you a dizzying sense of déjà vu, you are forgiven. The debt ceiling, or limit, reflects the amount of money the United States (US) Congress has authorized the government to borrow, and Congress can authorize increases when the government nears or reaches the existing limit. According to the US Treasury Department, Congress has acted to effectively raise the debt ceiling 78 distinct times since 1960. Occasionally, policymakers have struggled to reach consensus to authorize increases.¹

The US effectively reached the debt limit in January, triggering “extraordinary measures” by the Treasury Department to allow continued servicing of existing debts and obligations. Treasury Secretary Janet Yellen has issued a warning that these extraordinary measures may be exhausted as soon as June 1.² 

As potential threats loom large, we’re seeing news articles in abundance explaining what to expect next.

We wouldn’t be human if we didn’t share in your frustration over the lack of resolution to date. It’s stressful to watch huge, consequential events unfolding, over which we have no control. And who needs more stress in their life?

Which is why we encourage you to think of your finances entrusted to our care as a bright spot of relief in an otherwise unmanageable world. In the face of everything we cannot control, the one place you can call your own shots is within your finances with us at your side.

And here’s more good news: As an investor, you don’t really need to know that much about the real-time details of the debt ceiling negotiations. For instance, how closely did you follow last month's banking debacle?

Open Window Insights: Bank Runs & FDIC Limits

Instead, as with any other breaking news, a healthy degree of arm’s length disinterest will likely serve you best, especially if you might otherwise respond to the current fever pitch of news that’s news because it’s in the news.

To further illustrate, let’s consider your most advisable financial strategy under various outcomes of debt ceiling negotiations.

A Last-Minute Resolution

With history as our guide, it is perhaps most reasonable to expect today’s political brinksmanship-as-usual will lead to some form of resolution, probably arriving at the last possible moment. Then what? Most likely, the “fix” will be partial and imperfect, and the hand-wringing will continue apace over the next challenges inherent in the latest patch. The talking points might shift, but markets will remain as volatile as ever. In this most likely scenario, we would advise …

Staying invested in your carefully constructed investment portfolio, structured for your personal financial intentions.

A Failure of Negotiations

What if negotiations in Washington fail? What if we experience US credit rating downgrades, debt defaults, and unpaid Social Security benefits (to name a few of the uglier possibilities)? In a worst-case scenario, the US dollar could lose its global currency status, a position it’s held since before most of us were born. What then?

If a worse- or worst-case scenario occurs, you'd see a re-pricing of the good, bad, and ugly news well before we can successfully trade ahead of it. Diversification would be as important, if not more critical. Selling in reaction as markets adjust to the worsening news would remain as ill-advised as ever. In other words, your advisable course would remain… Staying invested in your carefully constructed investment portfolio, structured for your personal financial intentions.

A Timely Resolution

Last, and probably least likely, what if Washington defies our doubts, and achieves a happy and timely debt ceiling resolution, with little to no harm done? Hey, anything is possible. In this best-case scenario, the breaking news would be better than most of us expect, so markets would likely respond at least briefly with better-than-expected returns, rewarding us for staying put. At the same time, just in case the next bit of news were to disappoint or even be less exciting than expected, we’d want to temper any concentrated market exposures by, you guessed it… Staying invested in your carefully constructed investment portfolio, structured for your personal financial intentions.

Can We Afford the National Debt?

Rather than asking: Will Congress allow the borrowing of more debt? A better question might be: Can We Afford the National Debt? 

Open Window Insights: Can We Afford the National Debt? 

Interested in learning more about the debt ceiling? Reach out any time! 

Otherwise, guess what we would advise you to do while the "debt crisis" continues? If you’re not sure, we’re here to talk. Give us a call at (775) 827-0670 or set up a time to connect at www.openwindowFS.com/connection. 

Sources

1. 1 “Debt Limit,” US Department of the Treasury. Provided by Dimensional Fund Advisors. 

2. 2 “Debt Limit Letter to Congress Members,” US Department of the Treasury, May 15, 2023. Provided by Dimensional Fund Advisors.