We expect continued drama and volatility as the debt ceiling deadline approaches. As we speak, the U.S. Congress continues to negotiate the terms of a compromise that would re-open the federal government and, lift the “debt ceiling”. The debt-ceiling breach is far more important than the government shutdown. A breach could trigger chaos, but its doubtful it will happen.

What action should investors take?
Right now, do nothing. We believe that the debt ceiling will be resolved at the eleventh hour, and we expect drama. Failure to raise the debt ceiling will be disruptive.  However, those with long time horizons are advised to avoid making portfolio changes. Episodes like these are unpleasant. However, they’re also a common component of markets.

What’s at issue?
The U.S. has bills and tax receipts are insufficient to cover those expenses.  Therefore, the U.S. must issue debt to pay their bills. However, there’s a limit on how much debt the U.S. can take on. It’s called the debt ceiling.  If Congress doesn’t lift the debt ceiling, and the U.S. is unable to pay its bills, it defaults.

Is this a good way to legislate policy?
It’s very dangerous. Policymakers are putting the U.S.’s status as a “reserve” borrower and currency in jeopardy, all in a bid to extract concessions or advance a political agenda.

Is there a way out?
Essentially, it must raise the debt ceiling.

Will Congress raise the debt ceiling?
Yes, we believe it will. Policymakers are not crazy, at least politically speaking. If the U.S. breaches the debt ceiling and defaults, the blame will fall squarely on elected leaders and the political fallout would likely be severe.

What is it going to take to raise the debt ceiling?
Congress is laying the framework for a bill that provides funding sufficient to re-open the federal government for the next few months, raises the debt ceiling to allow the U.S. government to continue borrowing until early-2014. Also, a face-saving compromise at the last minute will also help.

Special thanks to our friends at Morningstar Investment Services who contributed their thoughts on the debt ceiling.

Recent Posts

The changing face of investing

The changing face of investing

You may remember visiting a stock broker with your parents as a child. The ground-floor office had large glass windows that gave out onto the street. The black lettering on the windows had gold edges that sparkled when the sun hit them. Inside, a nice secretary sat at...

read more
4 Ways to Show Widows Love on Mother’s Day

4 Ways to Show Widows Love on Mother’s Day

Mother's Day is a special occasion where we are able to come together and appreciate all that the mothers in our lives have done for us. But for widows, Mother's Day may be a challenging reminder of what they have lost. Regardless of whether a woman is newly widowed...

read more
Interactive Post-Pandemic Travel Webinar

Interactive Post-Pandemic Travel Webinar

“A journey of a thousand miles must begin with a single step.”–Lao Tzu We are excited to host an upcoming interactive Zoom webinar featuring Darren Humphreys from Travel Sommelier. As travel slowly becomes a popular topic again, Darren will share important information...

read more