The market finished up last week despite declines on Friday afternoon following an impasse in debt ceiling negotiations. Personally, I’m remaining hopeful that both sides will come together and resolve this issue. But what happens if they don’t?
There’s no actual game plan for this, as the United States has never defaulted before. However, we expect the Treasury to do what families do when their credit cards are maxed out, and they need to start robbing Peter to pay Paul.
Money will continue to come into the Treasury in the form of tax withholding and other tax payments. The Treasury will then prioritize what bills to pay first. We would expect that everyone will eventually be paid: Social Security payments for seniors and individuals with a disability, federal employees and military servicemembers, payments for federal contracts, and both interest and principal on federal debt. The big question is when everything will be paid, and in what order.
In addition to the impact on the stock markets, not just in the US but globally, a US default would most likely plunge the world into a recession. It would also impact future US borrowing, as a default would have a similar impact on America’s ability to borrow at low rates that defaulting on your credit cards and mortgage would impact you.
I believe the bigger issue is actually geopolitical. Our economy is the largest in the world[1], and the dollar is considered the world’s reserve currency[2] – the international monetary equivalent to putting money in your mattress. The strength of the US dollar and the American economy give us influence and power abroad. A default opens the door for other countries, like China, to strengthen economic and diplomatic influence globally.
Like other geopolitical events that impact the markets, there’s not much that we can control. If you are reliant on payments from the government, having extra cash or other liquid assets is a good starting point. Adding credit lines to provide a bridge if payments are delayed is another option.
If you have a large stock portfolio outside of your retirement accounts, you may want to open a Securities-Backed Line of Credit, or SBLOC. These typically offer reasonable rates, aren’t reported on your credit report, and allow you to access cash while your stocks and bonds stay invested.
Remember that this, too, shall pass. Good financial planning, emergency savings, and a diversified portfolio that is aligned with your goals are important no matter what is going on in Washington.
Your action item this week is to change the filter on your HVAC and schedule the spring maintenance on your system.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.
[1]https://www.worlddata.info/largest-economies.php
[2]https://realeconomy.rsmus.com/why-the-dollar-remains-the-worlds-reserve-currency/#:~:text=Other%20IMF%20analysis%20notes%20that,the%20global%20economy%20is%20secure.