The debt ceiling stand-off has caused some angst for investors who are considering how a possible default might affect their investments. We do think there may be some turmoil in the stock and/or bond markets during the next two weeks as the U.S. comes closer to defaulting on its debts. If there is no deal on raising the debt ceiling and the U.S. does default, that would hurt the global economy and possibly trigger a recession, although we think serious repercussions are unlikely. We do not, however, think people need to change their investments in anticipation of trouble. Turmoil in the markets is something we’re well accustomed to dealing with, as are recessions. We have weathered many of these storms and we have a playbook.
So far, other market participants seem to agree with that assessment and we’ve seen no sign that investors are panicking. After all, we’ve all seen this debt-ceiling brinksmanship before. If anything, some panic in the markets might actually serve to focus the minds of the politicians whose constituents would suffer if we were to default.
We think the long-term serious consequence of a debt default would be higher taxes. If the U.S. defaults, it would lose the trust of investors around the world, who would be less willing to buy government debt at low prices. They would likely demand higher interest payments. Higher payments are a compensation for the risk of not getting their money back. Taxpayers would be the ones footing the bill for higher interest payments. The government could either raise taxes or print more money, resulting in high inflation. Either way, taxpayers lose. That would be the real long-term consequence of a default and it would be highly regrettable.
If you want to take action, we’d suggest calling your lawmakers and demanding they resolve this without delay. A debt default could have catastrophic results that could last for decades. As for investments, the best course of action is to stick with your long-term plan. If there is turmoil in the markets, it’s OK to ignore it for the nonce. As always, it’s good to have a rainy day fund in cash so market fluctuation don’t affect your day-to-day life.
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