A hot topic in markets right now is that of the “debt ceiling” and how we can plan financially amid the ongoing political stalemate.
What is the ‘debt ceiling’?
The debt ceiling is a US legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the U.S. government can borrow to pay bills such as security, healthcare and military services. The U.S. debt grows when the government is spending more money than it is taking back in taxes or when its revenue is lower. When the debt ceiling is reached, Treasury must resort to “extraordinary measures” to finance government bills. Essentially, these measures can buy time for Congress to raise the cap and hopefully postpone a debt limit disaster.
The $31.4 trillion debt ceiling was reached at the start of the year and over the last few months a fight has been unfolding in Congress. In fact, in recent weeks real fears emerged that it could sink the economy after the Treasury Secretary, Janet Yellen warned of an “unprecedented financial and economic storm.”
June 1 is the deadline to lift the debt ceiling so that the government can pay all its debts. President Biden asserted that he would combine a cut in spending with tax adjustments to reach a deal but his promises have been “unacceptable” to date. Now Biden is meeting with House Republican Speaker, Kevin McCarthy, to ramp up efforts to resolve the crisis.
This is unchartered waters as the United States has never defaulted on its debts. It is partly why U.S. Treasury bonds are viewed as a safe investment and used by some banks as a backstop to counteract risky investments.
If history is an indicator, Republicans seem adamant on using the high-stakes timeline toward default to pressure Democrats into agreeing to spending cuts. In 2011 a similar stalemate took place and a deal to raise the ceiling was only agreed 2 days before the Treasury would have run out of money. It is likely that this kind of last-minute deal will take place again.
But what happens if the debt ceiling is not raised?
A failure to agree and lift the limit would trigger a default causing chaos in domestic and global financial markets and a spike in interest rates. Everyone would be affected, and individuals would see a drop in their wealth.
Amidst this uncertainty, it is worth noting that some stocks and market sectors are poised to benefit from economic conflict.
How can we protect your wealth during the debt ceiling crisis?
Certain stocks are made for this environment:
- Financial Services Stocks – A rising debt limit could lead to increased borrowing by the government, which has the potential to mean increased profits for large, well established banks and other financial service providers.
- U.S. Treasury Securities – Banks hold significant amounts of U.S. Treasury bonds and other government debt so a default could plummet the value of these assets. However, Treasurys’ paradoxically can perform well because even under these circumstances they remain a relatively safe asset.
- Gold – There are any number of gold stocks and funds you can choose from to invest in. Gold and other precious metals are always considered a safe option in times of economic unrest.
- Ultilities stocks – Economic turmoil doesn’t mean consumers stop watching tv, live in darkness or unplug the fridge. There are a number of trading options for us to look at.
For now, the debt ceiling negotiations between the Democrats and the Republicans continue. We can only hope a deal is reached sooner rather than later.