{"id":9895,"date":"2021-10-06T16:34:49","date_gmt":"2021-10-06T16:34:49","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9895"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"whats-behind-the-recent-debt-ceiling-drama","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/whats-behind-the-recent-debt-ceiling-drama\/","title":{"rendered":"What’s behind the recent “debt ceiling drama”?"},"content":{"rendered":"\n

Bryan T. from Erie, PA\nasks: <\/em>Hello Mitch, after going through this debt ceiling drama and seeing\nvolatility in the stock market, I\u2019m wondering if we\u2019re going to see a replay come\nDecember when the government runs out of money again. Your thoughts?<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thanks for sending in your question, Bryan. I\u2019m sure many\nother readers share your concerns, and you are correct to point out that we\u2019re\nlikely to have a \u201chere we go again\u201d moment in December, when this issue must be\nrevisited by Congress. <\/p>\n\n\n\n

Before I offer a few thoughts on the debt ceiling issue\nspecifically, I think it\u2019s important not to draw a straight line between\nSeptember volatility and the debt ceiling. I would argue that the two issues\nare not necessarily closely related. September volatility, in my view, was more\nclosely tied to the China Evergrande issue, the stock market pricing-in Fed\n\u2018tapering\u2019 later in the year, and perhaps some short-term growth concerns tied\nto the Delta variant. The debt ceiling issue was in the mix, in my view, but\nnot front-and-center by any means. <\/p>\n\n\n\n

Protect Your Retirement Against Life\u2019s Unknowns<\/a><\/strong><\/p>\n\n\n\n

Get our free guide to learn how to build a retirement strategy\nthat takes the \u201cwhat-ifs\u201d into account.<\/p>\n\n\n\n

You may not know what the future holds, but it is important to not\nget caught up in the fears of the unknowns and miss the opportunities ahead. In\nour guide, you\u2019ll get valuable and practical ideas to help build a\n\u201cweatherproof\u201d strategy that can potentially protect your retirement from any\nstorm that can threaten your financial security.<\/p>\n\n\n\n

If you have $500,000+ to invest, get our free\u00a0How Solid Is Your Retirement Strategy?<\/a><\/strong>* guide today.<\/p>\n\n\n\n

One reason I do not put too much weight on the debt ceiling\nissue is that the markets have seen this song-and-dance before, and the actual\nrisk of the U.S. defaulting on debt is far lower than advertised in the media. The\nnews made it seem as though the U.S. was teetering on the edge of default for\nthe first time in history, but that was not the case at all. Not even close.<\/p>\n\n\n\n

In order to truly understand the debt ceiling issue and its\nrisks, one must differentiate between \u2018government obligations\u2019 and debt payments\ndue. Government obligations \u2013 like Social Security payments, child tax credits,\nother entitlements \u2013 are not debts. Not paying entitlements on time could\nseriously impact American families that rely on them, but it does not equate to\na \u201cdefault.\u201d If you send your daughter in college $500\/month for living\nexpenses, and you are late one month or miss the payment entirely, you are not\n\u201cdefaulting.\u201d If you miss a mortgage payment, however, there are real\nconsequences to your financial and credit standing.  <\/p>\n\n\n\n

The debt ceiling issue has similar dynamics. Raising the\ndebt ceiling means meeting government obligations, like Social Security\npayments. But the U.S. Treasury does not need Congress\u2019s authorization to make\ninterest payments on debt, nor does it need Congressional approval to issue new\ndebt to refinance a maturing bond. Not making these debt payments would put the\nU.S. in default, which would be very damaging to the markets, in my view. But that\u2019s\nnot the issue in the debt ceiling debate, which is really focused on\nentitlement payments. <\/p>\n\n\n\n

Come December when the debt ceiling issue may return to\nheadlines, I\u2019d encourage you to remember this distinction between \u2018obligations\u2019\nand \u2018default.\u2019 To be fair, missing obligations\/entitlement payments could\nimpact sentiment and result in volatility, but it is not the same thing as\ndefault, which would be a credit event. At the end of the day, in order for the\nU.S. Treasury to stay current on debt interest payments, it can use tax\nrevenues, of which there are plenty to cover expenditures:<\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n

I would also encourage you to focus on the\nfundamentals when volatility is strong, especially if you are working towards a\nsuccessful retirement. Our guide, How Solid is Your Retirement Strategy3<\/sup><\/em>,\nwill provide valuable and practical ideas to help build a \u201cweatherproof\u201d\nretirement strategy that can potentially protect your retirement nest egg from\nany storm that can threaten your financial security.<\/p>\n\n\n\n

If you have $500,000 or more to invest, download our free guide, How Solid is Your Retirement Strategy3<\/sup>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Mitch unpacks the debt ceiling issue, including the difference between government obligations and debt payments due.<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-9895","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9895","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9895"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9895\/revisions"}],"predecessor-version":[{"id":10295,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9895\/revisions\/10295"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9895"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9895"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9895"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}