What is the Debt Ceiling?

Another year, another hype train in the news about impending financial disaster. That general theme is bandied about so often, you could be forgiven for throwing your hands up and wondering: great, what is it this time.

After all, there are many, many flavors of government financial shenanigans that give people jitters. 

Sometimes, its just a run-of-the-mill government shutdown, which occurs when the government can’t agree on what to spend money on. That’s happened a handful of times in the last few decades, and results in furloughs of federal employees and reductions in government services.

Other times, we get more imaginative and inventive squabbling, such as the “Fiscal Cliff” and resulting negotiations in the 2010s (A+ for the scary sounding name).

Sometimes, we even feel the reverberations of government quagmires from outside of our own borders. Anyone remember the Eurozone crisis in the mid to late 2010s?

But, at the current moment, we’re living through a rerun of what a film critic might call “an oldie, but a goodie.” What one may describe as the “It’s a Wonderful Life” of government fiscal showdowns. 

I am speaking, of course, about the debt ceiling (“debt ceiling crisis” if you want to sound extra serious). What is this debt ceiling crisis, exactly?

Well, in the United States, congress sets a limit on the maximum amount of debt the US can incur. The US consistently runs government deficits, and has continually accrued larger and larger amounts of government debts, something we’ve written about here.

The truth is, this debt ceiling thing happens a lot. In fact, the debt ceiling has been raised 78 separate times since 1960. 

Is this a big deal?

So, given everything I’ve said, does that mean the “debt ceiling” stuff in the news is no big deal? Not exactly.

You see, if we actually DID default on our debt, especially for an extended period of time, that would be really, really bad. US government debt is the backbone of the global financial system. It is considered the safest asset by most market participants. So safe, in fact, that banks are literally required to hold US government debt as their safest assets.

Many people love to argue. And, included in that subset of arguments they love to have are arguments about how bad a default would be, and whether or not a myriad of “creative” tactics could be employed to avoid catastrophe, ranging from advancing untested constitutional arguments, to minting a very special (and, I would assume, very shiny), trillion dollar coin, to prioritizing the payment of debt over other spending.

OK, so what should I do?

But, should you worry about the debt ceiling? In my opinion, no. Why not? Because, it’s like worrying about an asteroid impact—there’s nothing you can do about it. If a sufficiently large asteroid actually does hit your neighborhood, or city, or state, no amount of preparation is really going to make a difference. 

The reassuring thing is that, in reality, both parties acknowledge the debt ceiling must be raised. They each just have different things they want. So, in essence, it is just normal political bargaining combined with a game of chicken over an asteroid impact. 

Will the asteroid impact occur? Personally, I’m doubtful. I think everyone realizes that defaulting would be a pretty bad time.

So, we’re faced with two potential courses of action:

Option #1: Prepare for the asteroid impact

We could assume that both parties decide that their priorities are more important than averting an asteroid impact, and continue deciding that’s the case each day as the consequences begin to materialize. What would we do? Well, since treasuries form the backbone of the financial system, we’d probably need to diversify into physical goods. You could buy a generator, load up on propane, and bury some gold bars in your backyard. 

Now, if the impact occurs, that doesn’t mean you’ll be living the good life, but there is a tiny, tiny possibility that your preparations MAY leave you just slightly better off than your neighbors in this financial-apocalypse scenario.

If the impact doesn’t occur (as it hasn’t occurred 78 of the last 78 times the debt ceiling has been raised), you have wasted a lot of time, energy, and money stockpiling physical assets, potentially throwing your portfolio and financial plans irreparably off course.

Option #2: Don’t prepare for the asteroid impact

We could assume that one or both parties eventually agree that some form of compromise is desirable to an asteroid impact. This would be consistent with what has, historically, always happened.

If we’re right, good news: you did not derail your portfolio or your financial future in a futile attempt to protect against an avoidable, hypothetical doomsday event.

If we are wrong, you will be similarly situated to 99.9999% of the population, and we, along with everyone else, will be right there with you to help adapt our plan to the new reality.

So, relax!

We recommend Option #2. Life is full of uncertainty, from debt ceilings to asteroids. Part of your superpower as a long-term investor is an ability to look through the rocky turbulence of day-to-day shenanigans, and invest in the idea that, over long periods of times, human beings tend to invent new things, build new things, and make the world around us better. It’s a bet that has been historically unassailable, and in any case, is fundamental to a good life regardless of the financial implications.

So, we aren’t making a bet about what will happen with the debt ceiling, just like we don’t bet on other political events, because we don’t need to. Trying to outguess the market on what will transpire in politics is a BIG risk that we simply have no reason to take.

The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.