What should you do if Congress fails to increase the debt ceiling and causes the US Government to default on its debt?

Today, we’ll discuss why this is a low-probability but high-stakes issue and considerations for your retirement investments.

US Debt Default? How do you protect your investments?

Resources:

• Click here to watch our video on Investing during a recession. 

Full transcript:

SPEAKERS

Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
What should you do if Congress fails to increase the debt ceiling, therefore causing the US government to default on its debt? Today we’re going to discuss why this is a low-probability, but very high-stakes issue and considerations for your retirement investments. Stay tuned. Hey, there, it’s Alex and Anthony, from One Degree Advisors, and we help you gain confidence in your retirement. So, Anthony, the debt right now in the US is about $31 trillion. Essentially, what we need is more debt to pay off our current debt. Now, technically, we already did hit the debt ceiling limit, I think it was on January 19, 2023. But due to moving some money around, which sounds like it’s moving money around that maybe we don’t have, it sounds, it’s more like June when this issue is really going to have to be addressed. Another thing here is that failure to raise the debt ceiling could have profound consequences.

Anthony Saffer 0:56
That’s right. It’s definitely a big issue if something were to happen. And there can be a lot of hyperbole around that. But as NBC News reported, what are the potential consequences? Could be anything from stock market crash, higher interest rates for consumers, a weaker dollar US, US debt, credit downgrade, or things like social security could be affected even our military.

Alex Okugawa 1:17
So real quick, let’s just go into what is the debt ceiling? First and foremost.

Anthony Saffer 1:21
Yeah, so the level of debt that the government can assume is basically capped. And Congress has the ability to add a law in there where it can increase. So like you said before, it’s basically to take on more debt to pay the existing debt.

Alex Okugawa 1:36
And the thing is, these debt ceiling battles, this is nothing new. And I think Schwab had a great piece that they put together. And it says that Congress has raised the limit more than 75 times since 1960. But here’s the thing we all know, we live in a world where things continue to get more and more politicized. It’s more about political theater than anything else. I mean, listen, if politicians want to get reelected, if that’s really what their goal is, they want to stay in power, I think the last thing they’re really going to do is let the US default on its debt. Now, again, it’s a big issue, they’re going to make it sound big and loud and scary. But the probability of something like this happening is very, very low.

Anthony Saffer 2:17
Yeah, many people will argue that the elections, and the political system is broken, simply because politicians just want to get reelected. In this case, it sort of works in our favor, because people don’t want that to happen on their watch. So do politicians know that this is extremely serious? Absolutely. Is there a way out of this? Yes, they have to basically agree, which they have many times before. And this is really a negotiation. I mean, you could call it political theater, people are trying to get what they want on each side of the aisle. And that’s what’s happening.

Alex Okugawa 2:47
But what would be the worst-case scenario, right? Let’s say we don’t meet our debt obligations. What happens then?

Anthony Saffer 2:52
Yeah, so let me read this, this quote from Schwab, it says a default would be an unprecedented event that would likely have dramatic and unpredictable repercussions in the global financial markets. The most serious recent situation were really kind of got down to the wire was in the summer of 2011, very contentious debate going on. Even s&p as the rating system downgraded the quality of US debt, which was a pretty big deal at the time. And headlines came out that, you know, this is a massive type of thing. And it was kind of weird what happened, because stocks were very volatile, leading into that time. But ultimately, after 2011, they ended up much higher after a year. And then even two years later, in 2013, when it happened, again, stocks ended up higher, we don’t always know where that’s gonna go. But those are just some recent instances of that. And the other thing that we have to keep in mind here is that with the US paying this big debt, the lower interest rates, even though they have gone up to some degree, lower interest rates mean lower payments. Okay, so there is a motivation overall, to keep interest rates at a relatively, you know, doable level so that they can pay that sort ofdebt.

Alex Okugawa 4:02
That interest on our debt doesn’t become uncontainable. So again, it’s a low-probability event very unlikely to happen. I think, you know, one of the worst things people can do is make huge, drastic changes on this. But in an event like this, what would do well?

Anthony Saffer 4:18
Yeah, so it’s very hard. If you hear any commentary on it, it’s very difficult to predict what would actually happen to something like this simply because it would be so massive, and like you said, low probability. Invesco put out this piece, and it says from in July 2011, to September 2011. Now again, this was leading up to the debt ceiling debate. So this was more like the volatility that came with it. So people will argue and say, Okay, well, what would be good during a time like this probably like gold, even safe related investments. It doesn’t quite make sense. But US Treasuries have typically done well sure as a safe haven in this type of scenario. Others will say you know, FDIC insured cash counts. So others would argue, Well, you probably want to just go to a different high-quality currency that, you know, would be outside of this.

Alex Okugawa 5:09
And, you know, the thing is when I, when I looked at all this, and as we were going through the notes, saying, again, what would do well, in a situation like this really a catastrophic situation, I can’t help but think, you know, the people that are kind of the doom and gloom, and they’re preparing for this event, like, how long have they been like that for they’ve missed out on tremendous gains, you know, you have to have at a certain level of faith in our system, and you have to have to have confidence. There can be a certain cynical side of you to say, well, things don’t go right. What can I do? So maybe I do have a decent amount of cash sitting on the sidelines, if I do choose to have gold, maybe I don’t put gold in my portfolio because it’s not the best investment. But maybe I do have some physical gold in my house, right. There are other things that you can do to kind of hedge against something like this. But to fully think that, oh, yeah, this is going to happen. I got to fully prepare. I don’t think that’s the right path for people to head down. Some diversification is good, but approaching this in a meaningful way likely makes the most sense. Now what might be a bigger concern is a potential recession that many economists have been predicting. We recently posted a video investing during a recession. You can watch that above. And if you’d like to learn how we can help you gain confidence in your retirement, visit our website at onedegreeadvisors.com/getstarted/.

Transcribed by https://otter.ai

The One Degree Blog

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures