In a matter of days, the United States government could potentially default on its debt for the first time in history. The showdown in Washington is causing many folks to become very anxious about the future, and how a US default might impact their retirement plans.
If you’re paying attention to the major news media outlets, you know exactly what I’m talking about. Perhaps you are one of the folks who’s very nervous about the future of the economy, how markets will react, and what will happen to your retirement prospects.
If you don’t pay attention to the mainstream corporate media, your life is probably a lot less stressful and generally more pleasant.
There’s a big battle going on in Washington over whether the US should raise the debt ceiling. Republicans want to cut spending and are using the debt ceiling as leverage to get what they want. Democrats want a “clean bill” to raise the federal government’s ability to borrow without negotiating any concessions.
If they can’t come to an agreement before the federal government runs out of money in June, the unthinkable could happen. The US Federal Government could potentially default on its debt.
What is the debt ceiling?
The debt ceiling was created in 1917, and it put a limit on the government’s ability to finance its operations.
The US has continuously had fluctuating public debt since the US Constitution went into effect on March 4, 1789, with the exception of about one year between 1835 and 1836. According to the US Treasury Dept. that was the first and only time that all the US government’s debt that was paid off.
Prior to 1917 no debt ceiling existed. Congress would have to come to a vote to authorize special loans, or to permit the treasury to issue debt. During World War I, however, Congress created the debt ceiling as part of the Second Liberty Bond Act of 1917. The debt ceiling provision of the act allowed the treasury department to take on debt without specific congressional approval, as long as the total debt fell below the debt ceiling.
The US debt ceiling has been raised, extended, or revised 78 times since 1960 according to the department of treasury. In each instance in which the US federal debt was in jeopardy of breaching the debt ceiling, Congress acted before the US failed to pay its bills.
The government routinely spends more than it generates in revenue. The last time the federal government ran a surplus was in 2001, and US debt has increased under every presidential administration since Herbert Hoover. Over the past 100 years the federal debt has increased from $408 Billion to nearly $32 Trillion in May of 2023.
Past Debt Ceiling Crisis:
Rahm Emanuel, then chief of staff to President Obama, famously said,
“You never want a crisis to go to waste. And what I mean by that [is] it’s an opportunity to do things that you think you could not do before.”
Our elected officials (on both sides of the isle) love to use a crisis to get things done they would not have been able to achieve otherwise. The media on the other hand won’t let a good one go to waste either. They foment fears in order to attract more eyeballs to their broadcasts in order to sell advertisements.
Let’s revisit a handful of past Debt Ceiling Crisis showdowns to put this into perspective.
1995 Debt Ceiling Crisis
A request to raise the debt ceiling led to heated debate in Congress over the reduction in the size of government. Republicans had swept both the house and senate election in 1994. They wanted to cut spending and reduce the deficit spending. This led to a non-passage of the federal budget and the US federal government shut down of 1995–96.
I was 15 years old, and underwent treatment for thyroid cancer that Sept. My mother worked for the federal government in the Agricultural Statistics Dept. in Des Moines at the time. She was furloughed for several weeks. The ceiling was eventually increased, and the government shut down was resolved and she went back to the office.
Jan. 1st, 1995:
S&P 500 465
Dec. 1st, 1996:
DJIA 6,520 (+69.6%)
S&P 500 743 (+59.7%)
2011 debt ceiling crisis
Republicans in Congress use the debt ceiling as leverage for deficit reductions. The United States was still reeling from the financial collapse of the Great Recession. The fight over the debt ceiling led to an S&P credit downgrade of US debt, and the Dow Jones industrial average fell 2,000 points in late July thru early August. However, the crisis was resolved and the battle over raising the debt ceiling came to an end. Markets recovered quickly and the rest is history.
Jan. 1st, 2011:
S&P 500 1,282
Dec. 1st, 2012:
DJIA 13,027 (+12.5%)
S&P 500 1,422 (+10.9%)
Debt ceiling crisis of 2013
Republican members of Congress once again opposed raising the debt ceiling without additional spending cuts and Democrats opposed (are you beginning to see a pattern here)? This time Republicans called for defunding the Affordable Care Act, President Obamas ‘signature legislation.
They also sought privatization of Medicare and Social Security, cuts to food stamps, and switching to using the chained CPI when determining future inflation adjustments for entitlement programs. They also demanded for tax reform, means testing for Social Security as well as raising the Full Retirement Age, and to end agricultural subsidies.
Quite the overreach if compared to the showdown going on in Washington today. Not all was lost, however. After a temporary government shutdown with limited operations the debt ceiling was raised once more. Life went on, and the market continued to rise.
Jan. 1st, 2013:
S&P 500 1,480
Dec. 1st, 2014:
DJIA 16,087 (+22.7%)
S&P 500 1,807 (+22.0%)
What’s Different About the Debt Ceiling Crisis of 2023?
It’s been said that history doesn’t repeat itself, it rhymes. This time the Republican’s ask seems much less than previous showdowns like 2013 for example. However, they want spending cuts just like past showdowns.
They are also pushing for enhanced work requirements to receive assistance from federal aid programs, such as SNAP, formally food stamps, TANF, and Medicaid assistance for childless adults.
Democrats on the other hand want to raise the debt ceiling without any concessions or negotiations to curb spending. They want a “clean bill” and believe their colleagues on the other side of the isle are behaving irresponsibly.
Frankly, it seems like we’ve seen this movie before, but is this time different?
Most likely the United States will not default on its debt. Congressional Republicans will use the debt ceiling debate as leverage, and to draw attention to the ever-ballooning national debt, which is now nearly twice as much as it was in 2013.
Democrats on the other hand, will use the debate to highlight how extreme the Republican Party has become, and how dangerously close they are to causing the United States to default on its obligations.
Both parties are using the issue as a political football to kick around, but in the end I believe they will come together to raise the debt ceiling as they have in the past. The game of chicken will soon come to an end because neither party wants the US to default on it’s promises.
The Media Is Selling Your Attention
The corporate media is salivating over the battle in Washington. It’s nearly impossible to go for an hour of viewing without being exposed to another “sky is falling” segment regarding the possibility of the US defaulting on its debt.
Why are you hearing so much about the debt ceiling debate right now?
The news outlets care about you, your family, your mental health, and your financial wellbeing. The executives at CNN, MSNBC, FOX and other mainstream outlets all want the same thing for you. They want you to be informed with unbiased facts so that you can make an emotionally-free educated decisions about how to react to the world around.
Can you feel the sarcasm jumping off the page? Cause I’m laying it on pretty thick!
The news is no longer about reporting the news. It hasn’t been for a very long time. It’s about generating revenue through advertising dollars.
Major media outlets fund their operations by selling your attention to the highest bidder. In order to hold your attention, they have to scare the living daylights out of you.
If everything’s going great and there is no crisis or scandal to report, you’re less likely to tune in. That’s great news for you and your level of anxiety, it will be a lot less.
However, it’s terrible for corporate media outlets who want to sell toothpaste, automobile, and pharmaceutical advertisements for billions of dollars.
Long Term Investing
Long-term investors don’t panic, and they don’t make emotional decisions based on short-term news cycles. They appreciate that time in the market, not timing the market, is how you build wealth.
Folks who have experience the Triplett-Westendorf Financial Group PT5 retirement plan process, understand our philosophy quite well. That “Every dollar has a purpose, and every dollar has a timeline.”
Money that you need to spend some time in the next 12 to 24 months should not be exposed to market risk. In fact, we’d suggest that dollars that you might need to spend some time in the next 3 to 10 years should probably be sheltered from major equity and bond market downturns. We don’t know when they’ll happen, but we do know that they will happen, and there are strategies that could be implemented to insulate your yourself from the inevitable.
On the other hand, money that you don’t need to fund a comfortable retirement lifestyle for at least 10 years or longer could be invested in managed equities for long-term growth. After all, equity investing has proven to be one of the best ways to outpace inflation time in again, over long periods of time.
Developing a long-term recession-proof retirement strategy isn’t a pipedream. We routinely do it for the families we serve guided by our PT5 Step Process designed to absorb the inevitable market fluctuations.
Do so for yourself and this just might be the ticket to lowering your stress, and extending your life. Besides planning for a recession proof future, do yourself a favor. Turn off the television and go outside for a walk in the sun. The flowers are in bloom and the trees are sporting a new set of leaves.
Everything will be OK!