There are a variety of headlines you may be seeing in the news that might make you question the future of the United States government and economy.
One big event we are seeing in the news is the upcoming presidential election on November 5 of next year, ringing in the 47th United States President. As of right now, there are more Republican candidates running for office than Democrats, with former President Donald Trump and current President Joe Biden headlining the general election.
In other news, there is a current debate between House Republicans and President Joe Biden on the US debt ceiling, also known as the debt limit. The last time the US faced this big of a debate on the debt ceiling was back in 2011 where two parties of Congress could not agree on a budget plan to help the federal debt. This debate continued until the Budget Control Act was established, raising the debt ceiling by $900 billion. Since the current disagreement on the debt ceiling is between President Joe Biden of the Democratic Party and House Republicans, the matter may even influence candidates running in the upcoming presidential election.
What is the Debt Ceiling?
According to the US Department of Treasury, the debt ceiling is the maximum amount of money the US government can borrow to meet its current legal obligations. Some of these obligations include Social Security, Medicare benefits, military salaries, tax refunds, and more.
The debt we're referring to is a compilation of legal obligations and any other debts accumulated during past presidencies. The current US debt stands at $31.4 trillion.
According to the Congressional Budget Office, prior tax receipts report that unless the debt limit is increased, the federal government is expected to deplete its funds as early as June.
What is Preventing a Decision to Raise the US Debt Limit?
The ongoing disagreement between President Joe Biden and congressional leaders is delaying the final decision. House Speaker Kevin McCarthy of California, and other House Republicans are against raising the nation’s borrowing limit, potentially risking a nationwide financial crisis.
McCarthy has since then introduced and passed a bill that seems to slightly change the nation’s approach to handling this debt.
The 320-page bill also known as the “Limit, Save, Grow Act” states they will raise the nation’s
$31.4 trillion debt by $1.5 trillion but as a bargaining chip to make other adjustments. Some changes include budget cuts to domestic programs, reduced funding for federal agencies to the amounts set in 2022, revoking the green energy tax credit, and the termination of any new Internal Revenue Service (IRS) funding approved within the Inflation Reduction Act. Keep in mind the newly proposed debt limit does not authorize any new spending commitments, only existing ones.
What is a Default?
Although McCarthy’s bill includes a debt limit increase, Biden’s concerns surrounding the provisions to existing programs are prolonging the settlement, making a default possible. A default is the result of the US government not paying its legal obligations, which in this case may happen if a debt ceiling increase does not occur.
Following his meeting with congressional leaders, President Joe Biden made a statement on May 9 regarding the nation’s debt limit. Biden stated he wants to ensure the country “does not default on its debt for the first time in history.”
“And everyone in the meeting understood the risk of default,” said Biden. “Our economy would fall into a significant recession. It would devastate retirement accounts, increase borrowing cost,” he continued. “According to Moody’s [an American financial services company], nearly 8 million Americans would lose their jobs and our international reputation would be damaged in the extreme.”
When Will a Decision be Made?
A meeting between President Joe Biden and top congressional officials was set to take place this past Friday but postponed to sometime this week. This leaves only weeks until the Treasury Department’s deadline of June 1, the day the US government may begin running out of money to pay its bills.
Treasury Secretary Janet Yellen warned Congress with a letter saying, “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”
Economists say a delay in a decision can have a detrimental effect on both US and global economies.
What Does This Mean for You?
A default on the debt ceiling may cause complications for government agencies, financial institutions, and more, but there are a couple of ways you can prepare.
A default on the US debt limit may have a greater effect on those relying on retirement accounts or social security benefits as their primary source of income. Retirement accounts typically have a higher exposure to US bonds and are less exposed to stocks, potentially making them more vulnerable. In this case, fixed income funds such as corporate bond funds, certificates of deposit, and treasury bills can be more at risk.
In a debt default scenario, social security payments may be delayed or terminated due to a lack of funds for government agencies.
"Even a short delay in the payment of Social Security benefits would be a burden for the millions of Americans who rely on their earned benefits to pay for out-of-pocket health care expenses, food, rent and utilities," said Max Richtman, President and CEO of the National Committee to Preserve Social Security and Medicare.
Regarding a debt default, short-term effects may include fear and high volatility for some investments. Meanwhile, long-term effects can be a decline in bond values and higher interest rates on US debt.
If you are unsure about what you can or should do when managing your investments during this time, having a clear line of communication with your financial advisor may be a good first step.
Given the economic environment and how fixed income funds may be the most affected, having your financial advisor investigate your exposure to these types of funds may be an effective way to see where you stand. You can also have your financial advisor investigate other options when considering your exposure to fixed income funds, and possibly reallocating your assets as a solution that works for you.
Disclosure: This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
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