If you are unfamiliar with the current tug-of-war going on in Congress, you must be “living under a rock” to borrow a line from the GEICO commercials. At the center of all the discussion is a very simple process, Congress needs to pass a resolution permitting the United States to borrow more money than the current limit. If the limit is not increased, then the U.S. cannot pay all of its obligations because our government is spending more than it is taking in.
The debt ceiling has been increased numerous times in the past, often without much fanfare. However, since neither policy party can raise the current debt ceiling without some support from some members of the opposing party, the tug-of-war has begun. In my personal opinion the financial stewardship by our Federal leaders has run amuck. The spending has gone unchecked for numerous reasons and our government has gone without a budget. Whether the answer is higher taxes, spending cuts, or some combination of the two, the available time to resolve the issues is coming to a close.
While the resolution to increase the debt ceiling is said to be simple, to write, pass, and implement, the ability to draft the agreed upon legislation for the spending cuts and changes to the tax code will take time to draft, revise, and then pass.
With this legislation pending, the financial markets have been on a roller coaster ride. Whether the drops, recovery, or gains were a result of the debt ceiling talks, profit announcements, or the resolution of the Greek debt crisis, it has been a ride. Thus far, the financial markets have not discounted the U.S. debt even though the possibility of a default, whether technical or real, lingers in the air. In most cases for a default to occur, the U.S. would have to miss a payment on its debt. Should the debt ceiling remain constant, the government is still collecting income daily and has assets that could be converted to cash in order to meet some of its daily obligations.
No one has the crystal ball to know exactly what will happen. While the extremes are within the realm of possibilities, the likelihood of another financial meltdown is not probable in my opinion. Most businesses will not be significantly impacted should Congress fail to reach a compromise. It is important to remember this potential issue can be resolved by both political parties compromising and passing prudent legislation for our country to remain financially strong and a world leader. No outside approval is required.
Over reacting to this situation may cause more financial harm than permitting investment positions to remain in place. One of my Texas clients contacted me saying their neighbor is selling everything and getting as much as possible in cash. This is clearly going to the extremes. For me, this is very similar to the millennium bug where thousands stocked up on food and water because everything was supposed to stop working at midnight on December 31, 1999. Everyone watched around the world and found that few systems failed to continue to perform and that the millennium bug was just a pest and not a plague.
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