Even if the debt ceiling continues to go up, growing national debt could lead to higher interest rates over time or lower stock returns, according to some economists. That makes it something to consider as you’re devising your investment strategy. A great way to kick-off that strategy is by opening an investment account with SoFi Invest®.
Full Answer
Why is the debt ceiling so important to the US economy?
The reason it is so key to our economy is the U.S. runs the risk of defaulting on their debts to foreign entities if it is not raised. Recently, President Trump struck a deal with Democrats extending the looming deadline for another three months. So, for now, all is quiet on the home front.
What happens if the US debt ceiling is not raised?
What if the US debt ceiling is not raised? Unless a deal is reached to suspend or raise the debt limit, the US will be in danger of defaulting on our national debt. There are some steps the Treasury can take to forestall a default, including spending down saved cash and other emergency measures.
How does the high cost of debt affect stock prices?
The high cost of debt works against investors in another way: As consumers' budgets get tighter, so do their purse strings. When people stop spending on goods and services, company revenues take a hit. And unless you're Tesla (ticker: TSLA ), falling profits translate into declining stock prices. What Is Modern Monetary Theory? ]
How does the national debt affect your investment portfolio?
The national debt may seem as far removed from your investments as your parents' debt is from your bank account. But like your parents' debt, if the federal government's budget deficit grows too large, it could impact your daily life and investments in a painful way. What Are the Four Factors of Production?
How does debt affect the stock market?
Greater concern by investors over the National Debt can lower investor confidence in government securities, causing the government to increase the yield on those securities.
What happens to the stock market if the U.S. defaults on its debt?
It would greatly impact the economy and people in the U.S. A default would increase interest rates, which could then increase prices and contribute to inflation. The stock market would also suffer, as U.S. investments would not be seen as safe as they once were, especially if the U.S. credit rating was downgraded.
What will happen if the national debt continues to rise?
The higher the national debt becomes, the more the U.S. is seen as a global credit risk. This could impact the U.S.'s ability to borrow money in times of increased global pressure and put us at risk for not being able to meet our obligations to our allies—especially in wartime.
What is the current U.S. debt ceiling limit?
116-37 specifies that the amount of borrowing that occurs during the suspension of the debt limit will be added to the previous ceiling of $22.0 trillion. As of June 30, 2021, an additional $6.5 trillion had been borrowed, bringing the amount of outstanding debt subject to the statutory limit to $28.5 trillion.
What to invest in if U.S. defaults on debt?
“You need to diversify among asset classes -- stocks, bonds and cash. Diversify among investments in different countries -- U.S., Europe, Asia and Latin America. Diversify your stock holdings among different industries. And diversify your bond portfolio between government and corporate bonds.”
Could the U.S. ever pay off its debt?
Congress has made many attempts to lower the national debt, but it hasn't been able to reduce the growth of what the nation owes. The U.S. debt is the outstanding obligation owed by the federal government.
How much would each person have to pay to pay off the national debt?
$91,490 for every person living in the U.S.[7] $234,286 for every household in the U.S.[8] 70% more than the combined consumer debt of every household in the U.S.[9] 6.8 times annual federal revenues.
What country is in the most debt?
Japan, with its population of 127,185,332, has the highest national debt in the world at 234.18% of its GDP, followed by Greece at 181.78%. Japan's national debt currently sits at ¥1,028 trillion ($9.087 trillion USD).
Is debt good for the economy?
When used correctly, public debt can improve the standard of living in a country. It allows the government to build new roads and bridges, improve education and job training, and provide pensions. This encourages people to spend more now instead of saving for retirement. This spending further boosts economic growth.
Who controls the US debt ceiling?
The Constitution grants Congress the sole authority to borrow on behalf of the United States. It has delegated that authority to the Executive Branch but placed a ceiling, or limit, on the total amount of debt that can be outstanding at one time.
Who owns the most US debt?
the U.S. governmentBy far, the largest owner of U.S. debt is actually the U.S. government, which holds Treasury securities in various government accounts and pension funds.
What would happen if the U.S. defaulted on its debt to China?
If China ever did call in its debt, it slowly would begin selling off its Treasury holdings. Even at a slow pace, dollar demand would drop. That would hurt China's competitiveness by raising the yuan's value relative to the dollar. At some price point, U.S. consumers would buy American products instead.
When does the federal debt ceiling end?
The national debt is about to collide with the federal debt ceiling again. An agreement reached in 2019 to suspend the federal borrowing limit ends after July 31. Investors with long memories may be nervous as this year's deadline approaches.
What would happen if Congress did not raise the debt ceiling?
However, if Congress still does not raise the debt ceiling, the US government would have to operate on a cash-flow basis, meaning that outflows (including interest payments on existing Treasury debt) would have to be funded by inflows (i.e., tax receipts and fees).
What would happen if all of the Treasury's cash balances were drawn and extraordinary measures have been exhausted?
If all of Treasury's cash balances are drawn and extraordinary measures have been exhausted, the Treasury would be at the limit of the debt ceiling. Such an outcome has not occurred in the modern era, and it remains uncertain as to exactly what developments would transpire next.
How much debt will the US have in 2021?
Publicly held US debt topped 100% of GDP in 2020 and is expected to reach 102% by the end of 2021. And the debt is projected to increase significantly in the future. The Congressional Budget Office (CBO) projects a federal budget deficit of $2.3 trillion in 2021—the second largest deficit since 1945.
Why do administration officials work behind the scenes?
Administration officials usually work behind the scenes to convince legislators of the importance of raising the limit relatively quickly and without fanfare. This approach helps limit financial market uncertainty, minimizing the potential for government borrowing costs to increase amid a debt-ceiling debate, while reducing investor concerns.
Why is it important to take a long-term view of your investments?
It's important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation. Ideally, your investment mix is one that offers the potential to meet your goals while also letting you rest easy at night.
When was the borrowing limit suspended?
The borrowing limit was suspended in 2019. At this time, there is reason to believe that the debt ceiling situation will be resolved with few, if any, political fireworks. Of course, this could always change. The national debt is about to collide with the federal debt ceiling again.
1. Unemployment Could Tick Up
After unemployment hit a record high of nearly 15% in spring 2020, the employment situation recovered gradually. But we’re not out of the woods yet: The latest unemployment rate was 4.8% for September, but that likely undercounts those who have dropped out of the workforce or are underemployed.
2. Social Security, Military Salaries Could Go Unpaid
One of the biggest risks to everyday life that comes alongside the threat of default is a pause in payments from the federal government. If the government defaults, it may not be able to pay folks who rely on it.
3. Credit Card Interest Rates Could Go Up
If the Treasury defaults on its obligations, it would create a ripple effect felt by nearly everyone in the U.S. who has any type of investment in the financial market or an interest-bearing loan, like a mortgage, auto loan or credit card.
4. New Home Buyers Could See Mortgage Rates Jump
There are two scenarios wherein yields on the 10-year Treasury, which often moves in lockstep with long-term mortgage rates, could rise if Congress doesn’t act swiftly.
5. It Could Roil Global Markets
U.S. government debt is the foundation of the global financial system and the most widely held investment asset. It’s universally considered ultra-low risk, because the United States has never defaulted on its obligations.
1. Government obligations such as Social Security and Child Tax Credit (CTC) payments could be paused
If the debt ceiling binds, the Treasury Department might decide to delay — or even temporarily halt — payments to millions of Americans and agencies.
2. Buying a home, car or credit card borrowing could get more expensive
The federal government is able to borrow at a relatively lower interest rate than other governments in the world because Treasury securities are viewed as a safe and liquid investment. The U.S. has never defaulted on any of its debts and managed to cover all of its bills — even if that’s just through approving more borrowing.
5. Default could trigger a recession, meaning job losses and income disruptions for millions
That’s not to say that default wouldn’t have massive consequences, even if it was quick. Experts describe default as having a ripple effect. Investors who aren’t paid back by the federal government might then be hard-pressed to fund their own obligations, with the circle getting bigger and bigger.
Even if the debt ceiling is raised in time, Americans could feel financial pain
Even if Congress fails to act, analysts point to other unconventional fixes to avoid default, such as the Treasury minting and delivering to the Fed a $1 trillion coin or enlisting the U.S. central bank to buy vulnerable debt.
Bottom line
However, what happens to the U.S. economy — and your wallet — depends on how long the stalemate lasts, whether the U.S. defaults and how long that default persists.
What is the debt ceiling?
The debt ceiling is a cap on the amount of money the U.S. government can borrow to pay its debts.
Why should I care about this?
If the government cannot borrow money to continue paying for programs, there will be real-world effects for millions of Americans. Here are some of those potential effects, according to Yellen, the White House and the Committee for a Responsible Federal Budget, a nonpartisan organization.
Would this be worse than a government shutdown?
Yes. This is an even bigger deal than a government shutdown. A government shutdown occurs when Congress does not approve a new spending bill for the next fiscal year, so new payments, such as paychecks, are stopped. In 2019, around 800,000 federal employees were impacted by a government shutdown, and markets dipped.
Why are we hitting the debt ceiling?
Technically, we already hit the debt ceiling on Aug. 1. But at that time, the Treasury Department started taking so-called "extraordinary measures" to continue to pay the government's bills. Basically, there is some accounting and investing sleight of hand going on. But one day, the department will run out of tricks and out of cash.
Does raising the debt ceiling allow the government to spend more?
Nope. Here's how Yellen put it during a Tuesday hearing on Capitol Hill: "It has nothing to do with future programs of payments, it's entirely about paying bills that have already been incurred by this Congress, in previous Congresses, and it's about making good on past commitments -- as you said, paying our credit card bill."
Why do we even have a debt ceiling?
One hundred years ago, Congress used to have to OK every instance of borrowing money -- a major inconvenience.
1. Ratings, ratings, ratings!
The S&P downgraded the country’s long-held AAA rating during the 2011 debt ceiling showdown. It is likely Moody’s and Fitch would follow suit, with the S&P possibly even further stripping the country
2. Demand, demand, demand!
With foreign countries owning about 45% of the Treasury’s outstanding securities, failing to pay could mean U.S. bonds would be in lower demand, therefore automatically meaning a higher-yield, especially if the U.S. is carrying a lower credit rating.
3. Contraction, contraction, contraction!
Running a deficit would be out of the question. About 60-70% of government spending is covered by federal revenues. That means, all those Social Security checks would feasibly shrink or perhaps some would stop altogether. Tax refunds owed might not be returned. Medicare benefits could cease.
4. Uncertainty, uncertainty, uncertainty!
Confidence in the country’s ability to handle an economic crisis would likely be questioned. With the U.S. government being the largest agent in the economy, consumers and businesses alike would lose faith in leadership across the board.
5. Markets, markets, markets!
Defaulting most likely would send the market into a panic and a run on the markets would ensue. We could see a swift violent reaction, much like we did in 2008, causing the market to crash.
What if?
If defaulting did end up taking place, though, it’s likely there would be a quick reaction to cure the issue. After all, the debt ceiling was raised expediently once after the downgrading from the S&P in 2011.
When will the debt ceiling be lifted?
In August 2019, former President Donald Trump signed a budget deal suspending the debt ceiling until July 2021. "The economy is not going to implode tomorrow because of the national debt," says David Primo, a professor of political science and business administration at the University of Rochester and a senior affiliated scholar at George Mason ...
How does national debt affect investment?
The National Debt's Impact on Investments. Investors need to be aware of what rising national debt means for the future of our economy and financial markets. More government bonds cause higher interest rates and lower stock market returns. As the U.S. government issues more Treasury securities to cover its budget deficit, ...
Why are bonds more attractive than existing bonds?
When interest rates rise, newly issued bonds are more attractive than existing bonds because they provide investors with higher yields.
Why do old bonds fall?
This is because higher rates increase the cost of borrowing for companies.
What happens if the federal deficit grows too large?
But like your parents' debt, if the federal government's budget deficit grows too large, it could impact your daily life and investments in a painful way. Not to be confused with the deficit, federal debt is the total amount or the collection of deficits throughout the years owed by the government. It now stands at more than $27 trillion, ...
Why should investors care about debt?
Rhea Thomas, senior economist at Wilmington Trust in Wilmington, Delaware, says investors should care about the debt because it has impacts on economic growth and could impact investments over time.
What is deficit in government?
The deficit is the difference between the government's revenues – which main ly come from taxes – and its expenses, such as national defense, health care, education and other programs, for a particular period. When expenses exceed revenues, the government has a deficit.
