When water enters a ship, alarms go off. When the US Treasury hits its debt limit, the economy goes off. Unless, something is done to make sure that the federal government can keep up its payments and expectations.
The US has reached its $31.4 trillion debt ceiling, and the US Treasury is taking extraordinary measures to ensure that the government does not default on its bills. In case the US defaults on its bills, its credit rating will suffer, while losing public trust.
US Treasury Secretary Janet Yellen admitted that the Fed hit its debt ceiling on January 19 and is working to ensure that the worst does not come to pass. As the debt limit amount is set by the Congress, either the Treasury has to find new ways to make payments or ask the Congress to raise the debt ceiling.
What does the national debt limit mean?
Just like you have a credit card limit on how much you can spend, the national debt limit is the ceiling for Treasury spending. The debt ceiling exists as the government spends more than it makes, creating a deficit. The debt limit is set by the Congress, and finding new means to pay existing bills means suspending new investments for the time being.
For on-going payments, the US government will have to place IOUs in the account and fill them in when the situation has improved.
Although the debt ceiling was initially put in place to make it easier for the government to borrow funds, in recent times it has become a political fireball with Congress working to restrict borrowing.
In case of a default, which has never happened before, the aftermath is most likely to cripple the US economy and global markets, raising borrowing rates.
The debt ceiling has been revised 78 times since 1960, and experts recommend revising the parameters periodically to avoid calamities.
How will hitting the debt ceiling impact American households?
As the Treasury finds its coffers empty, limiting spending is the first step to making things right.
The Treasury secretary estimates that by June it could entail postponing social security payments, tax refunds, federal employee salaries, and even closing national museums amongst others.
Delaying social security payments translates to less money in the economy, as people cannot spend what they do not have. It could ultimately push the US into a recession faster than expected.
The worst case scenario implies a severe downturn in the market, mass layoffs, and even higher interest rates. With no income and rising inflation, an average American household could soon find itself knocking the doors of poverty.
In short, defaulting on the US government defaulting on its debts will throw financial markets into disarray. After going through a tough year, where stocks and bonds suffered major losses, a default in debt payment will pile on to the existing economic burden, spreading panic across the board.
For an average American, it translates to higher rates for everything from credit card payments to mortgages, aggravating a bleeding budget. Furthermore, as uncertainty looms over the market, consumers are expected to bear the brunt of these changes.
The last time the US Congress hit an impasse, it plunged the stock market down by 14% in under four weeks while the bond market went haywire.
How to protect your money during a US debt ceiling crisis?
As both the S&P500 and the Nasdaq falls, the market has started showing the effects of the US hitting its debt ceilings as common folk worry about investments and expenditures.
One of the ways to protect your investments is to diversify your investments into different asset classes. The most preferred way of investing is through low-cost index funds that have been known to hold you well in the long-term.
Low cost index-funds help you withstand market turbulence and protect your hard-earned money. However, there is no denying that your risk tolerance will undergo a trial by fire in 2023. With recession 2023 looming over the horizon, the markets are already bracing themselves for a shaky economy.
Despite having well thought out investments, the world has never had to react to the US breaching its debt limit. If it happens, it will have global ramifications, and panic can set in as most economies look to the US while leveraging their bets on the global financial market.
The Congress has initiated emergency measures to stop the calamity that might befall us but there is no guidebook on how to tackle a crisis of this magnitude. The US Treasury might start with prioritizing certain payments and delaying others while urging the Congress to raise its debt limit.
