The next debt ceiling crisis

The government’s ‘Can I borrow more?’ limit

The Treasury debt limit, a.k.a the debt ceiling, is the max amount of money the Treasury can borrow by issuing debt (bonds).

The Treasury’s ability to issue debt is how it funds the federal budget.

‍But that’s not all!

‍It also creates a critical supply of Treasury bonds for the global economy. 

These bonds are heavily relied upon by banks, governments, companies, charities, and individuals for protecting and growing their cash. ‍

$500 billion’s worth is traded every single day.

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A comedy of catastrophes (not really funny, though)

It would have been unimaginably bad if we defaulted on those bonds…but let’s imagine just for fun! 

A recent Moody’s analysis estimated that a default would have similar consequences to the Great Recession: a 4 percent GDP decline, 6+ million lost jobs, 7% unemployment rate, even higher interest rates for everyone, and stocks dropping by as much as one-third. Big yikes. 

We’ve dodged that bullet once again, with Congress coming up with a last minute bipartisan compromise to suspend the debt limit for two years. But the cycle will continue, as it has for decades.

An endless encore of raise and repeat

The debt limit has been raised or extended 78 times since 1960: 49 times under Republican presidents, 29 times under Democratic presidents. 

It’s actually pretty weird that we have a debt ceiling at all; we’re one of the few democratic countries that has one. We ended up with this system because it seemed the practical thing to do during WWI when our government spending drastically increased. Before that, Congress had to approve every issuance of debt through individual legislation.

The debt ceiling gave the Treasury the flexibility to move faster, while politely reminding everyone that money isn’t grown on trees. (But it kind of is?)

Their plan totally worked and still inspires political leaders to approach spending with due respect for this reasonable debt limit! Jkjkjk.

In reality, the debt limit shifts as needed to accommodate the budget, not the other way around. And who sets the budget? Congress. So, not raising the debt limit when it's crunch time is like forgetting your wallet at a 31 trillion dollar dinner you said was your treat.   

Today, the debt ceiling is merely a clunky technicality of the legislative process…on a good day. On a bad day, it’s a pawn wielded in vicious showdowns between political parties. 

‍The Playbook take

The latest debt ceiling fiasco will not be the last. Does it affect your life? Yes, but that doesn’t mean your financial strategy should be guided by scary headlines and political whims.

Throughout your life as an investor, you’re guaranteed to encounter big, scary things that will make you worry if you’re doing the right thing – through recessions, disasters, bubbles, inflation, and personal calamities. It’s why 73% of Americans rank their finances as the #1 stress in their life.

A way to combat this (the only way, really) is to have a solid understanding of your long-term financial plan. Good financial plans are built to withstand these disruptions in the long run, and most importantly, keep you in your seat as an investor. 

So, ditch the drama, and let us build your plan in literally minutes.

‍To financial freedom and beyond!