How to prepare for a debt ceiling disaster
When it comes to most financial calamities, you don't see them coming until it's too late. Not so with the debt ceiling.
This post comes from Stacy Johnson at partner site Money Talks News.
Congress is once again using the debt ceiling as a negotiating chip in a game with the highest possible stakes -- the world economy.
Raising the debt ceiling allows the government to borrow more money to pay for spending Congress has already approved. Not raising it ultimately means bills going unpaid. To understand the ramifications, see our recent post, "9 things you need to know about the debt ceiling." But in essence, without an increase, our nation will be unable to pay its bills, undermining both our credibility as a country and the worldwide financial system.
How does that translate to Main Street? In the worst-case scenario, a stock market crash and higher interest rates on everything from credit cards to mortgage loans. That in turn would slam the brakes on business, increase unemployment and potentially push our economy into recession.
While this is the scenario many envision, some disagree. In a USA Today article called "Debt limit breach no big deal, some GOP lawmakers say," U.S. Rep. Ted Yoho, R-Fla., said, "I think, personally, [reaching the debt limit] would bring stability to the world markets."
Rep. David Schweikert, R-Ariz., said:
I will hear language like, "Well, we are heading toward the debt ceiling and you are going to default." Anyone that says that is looking you in the eyes and lying to you, either that or they don't own a calculator.
Financial calamity is typically something that happens suddenly, its causes only clear in the rear-view mirror of history. Not so with this potential nightmare: We can see it coming. So is there anything you can do to protect yourself? Let's examine the options.
Option 1: Do nothing and hope cooler heads prevail
It's important to distinguish between failing to raise the debt ceiling by the day it's reached (estimated to be shortly after mid-month) and the United States actually defaulting on its obligations.
It's not Armageddon if Congress misses the deadline by a few days, or possibly even a couple of weeks, especially if a compromise is clearly on the horizon. It's when the U.S. actually fails to pay an interest payment on its debt or other bills that the financial world begins to unravel.
Many experts have argued that while the former scenario is possible, the latter is highly unlikely. One of many examples: Last week legendary investor Warren Buffett said on CNBC, "We will go right up to the point of extreme idiocy, but we won't cross it."
If you fear a financial meltdown, there are things you can do. (More on that in a moment.) But remember that although stupidity seems to be running amok these days, the U.S. has never defaulted on its debt. And while there may be some in Congress who think this would help their political careers or "bring stability to world markets," they're the exception, not the rule. Odds are that one side or the other will blink.
Option 2: Sell, sell, sell
In the commonly accepted scenario, a U.S. default would result in a collapse of both stock and bond prices, decimating many 401k's and other investment accounts. To be on the safe side, you could get out of the way now by selling securities and holding cash until the crisis is resolved.
The problem with this approach: If you're wrong, it'll cost you.
The most likely scenario is that a deal will be reached. When that happens, the stock and bond markets will probably celebrate by going higher. So while there's risk in staying in the game, there's also risk in remaining in the dugout.
Option 3: Don't sell, but hedge your bets
"Hedging" refers to taking an investment position that will gain in value if your primary position goes bad.
For example, if you look at my online portfolio, you'll note I currently have about $200,000 in stocks. But I also hold an investment in gold: SPDR Gold Shares. I don't think gold is a great investment, but if something like a major war or debt default happens, my stocks would get crushed, but the gold would probably go up. Thus, gold is a hedge against my bet on stocks, which are a positive bet on the American economy.
There are numerous other ways you can hedge against a default, including raising cash, shorting U.S. Treasuries in the futures market or with ETFs, and moving out of small stocks to the biggest -- thus safest -- U.S. companies.
An investment hedge, however, can carry the same risk as insurance. If the disaster you're insuring against doesn't materialize, you're out the premiums you've paid.
What I'm doing
When it comes to investing, I'm so boring, paint could watch me dry.
When you looked at my portfolio, you may have noticed the last stock I bought was Ford, back in 2011, and most of my portfolio was purchased in 2009. The market has had lots of scares since then, as well as ups and downs. So why don't I buy and sell?
For the answer, look to one of the few stocks I did sell: Bank of America. I bought it in 2008 for $14. I sold it to take a tax loss in November 2011 for $5. My intention was to buy it back 30 days later; any sooner and the tax loss would have been disallowed. But did I? Nope. And now it's back to $14.
The point is, I'm not smart enough to time the market. So unless something's both catastrophic and certain, I'm unlikely to either sell, sell, sell or put on a substantial hedge. And while I do believe that a debt default would be catastrophic, so far it's not certain.
So I'm not doing anything with my existing investments, at least not yet. Here's what I am doing:
- Raising cash. Should the worst-case scenario occur, cash will be king. I'm keeping as much of it around as possible.
- Scouting potential investments. Thanks entirely to Congress, the market's been falling daily. Soon there will be bargains. If we don't default, I'm a buyer.
- Taking names. This article should never have had to be written. I won't forget those in Congress who created a national crisis for their personal political power. I will do everything possible to see they're gone at the earliest possible moment.
People always seem to have the wrong priorities. Obama should have not been focused on health care (and handouts to the insurance companies & doctors) when the economy was in the crapper. Should have worried more about helping the American worker than his "legacy" and what he'll put in the Presidential library. Nero fiddling while Rome burns.
The Republicans should be focused on how to get manufacturing jobs back to the US instead of Obamacare. Screw China. We should have exported stray dogs for them to eat, instead of letting all the US technological know how be given to China, along with American jobs.
Neither political party is good for the American people. The Tree of Liberty doesn't look too healthy right now, either. It might need some fertilizer.
Obama is simply out of his league (as Russian chess grandmaster Putin demonstrated with Syria) but Congress is filled with scumbags.
What reverend Mather Byles said during the Revolutionary War (he was a colonist who stayed loyal to the British) comes to mind: "What is worse, to be ruled by one tyrant 3,000 miles away or 3,000 tyrants one mile away".
We have the best Congress that someone else's money could buy. I think the 5% approval rating (down from a recent 12%) says it all.
I want to remind everyone that every time we reach the debt ceiling there is a debate in Congress over whether we should do it again. OMB records show that we have done this 106 times since 1940 but I don't remember going through this much drama since the Clinton/Gingrich showdown.
The key word here is "debt". It means that we've already maxed out our credit cards and now want to apply for a higher limit. The argument is now over ACA - a program that is likely to cost much more than its proponents will admit, but it could as easily be over the multiple wars we have fought and are now fighting, or the fraud and waste that permeates many social welfare programs like food stamps.
The hard truth is that our representatives in Washington - all of them - regularly spend more than they know they will be taking in. That's irresponsible on any level.
MIRAGE GUY:The leesch class is the 1% that gets corporate welfare.They built a Wal-Mart
here that pays no taxes for 10 years.Guess who`s taxes will go up to make up for that.Also,
as with other Wal-Marts, there`s a net loss of jobs in the community.
agree with everything in this article, including the lst 3 sentences: "This article should never have to be written, I won't forget those in Congress who created this mess, and I will do everthing possible to see they're gone!" Enough is Enough of those ignorant Tea Partiers. If they think this is a party, let them eat cake!
I read that by the 17th of October they will only have a scant 30 billion on hand to make ends meet.
Hey. Couldn't they just send someone over to rummage through the Koch Brothers couch cushions?...
Republicans have been winning away State Governorships while at the same time destroying Unions. Republicans have been outsourcing away American Jobs while cutting wages and benefits here. Yet so many folks have yet to figure this in YOUR FACE part out. The Dumbing down of America Continues.
The writer Chicken Little does not know what he/she is talking about. Chicken must be really hard up for something to write because this is nothing but echoing poorly written phony talking points. Look, I am a union member and CPA that understands we convince no one with these phony talking points.
The sequester was a big nothing when all the Chicken Littlies of the world predicted that the sky was going to fall. It didn't, so strike one. Next the Chicken Littlies of the world said the Shut Down would cause the sky to fall, it didn't. Between 80 - 90% of government employees are still on the job, so strike two. Now Chicken says if the debt limit is not increased the sky will fall, yeah right. With a track record like that I can hear the umpire getting ready to call Chicken out on strikes.
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