Count on this: If the United States government does not have a debt agreement, lawmakers will probably kick the can down the road.
Right now, the decision makers are talking big and raising the stakes, as if they’re playing poker. Unfortunately, they’re not playing with plastic treasury chips, but with the full faith and credit of the United States. And the dollar bills involved could easily fill up the halls of Congress.
For what it’s worth, here’s who owns the $31 trillion of debt.
Foreigners own about $7.3 trillion, or 24% of U.S. debt. Americans own the remaining $23.7 trillion.
So, what’s going to happen if there is no agreement? When it comes to playing poker with other people’s chips, it’s easy to bluff and raise the stakes. However, if the politicians don’t come together and the deadline passes, the markets MAY respond extremely negatively, forcing their hand. No politician wants to be associated with causing a huge market decline.
So, any turmoil that does occur could be very temporary.
The debate regarding the debt ceiling is not new. The government has routinely raised the debt limit numerous times: since 1960, 29 times under Democratic presidents and 49 times under Republican presidents. That’s 78 times that we’ve raised the debt ceiling.
Creditors are justifiably concerned about the rising indebtedness of the U.S. government as measured by our debt-to-GDP ratio, shown below:
The correct question to ask yourself is this: Are you truly a long-term investor? Are you comfortable not spending your investment for 10 to 15 years? If so, this is a sideshow that you should largely ignore.
This too shall pass.
Divided government involves loud voices and little change. Right now, both sides of the debate are bluffing that they have the winning hand. Ultimately, they will probably come to a compromise and raise the debt ceiling for the 79th time.
I will be keeping a very close eye on what’s happening.