Economists predict severe consequences if Congress fails to raise the debt ceiling by the deadline. Potential adverse outcomes include the layoff of federal workers, delaying Social Security payments for seniors, and a significant increase in mortgage rates. The deadline for the government default, also known as the “X-date,” is subject to change based on the fluctuations in tax revenue and spending, which can vary significantly from week to week.
This issue should concern every American because the ripple effect of a government shutdown will affect all of us somehow. Whether you are a house owner, a stock market investor, a retiree, a military, or a regular citizen, you will be impacted if this issue is not resolved.
What is the debt ceiling?
The debt ceiling is how much money the federal government can borrow to cover its expenses, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. Congress put This limit in place in 1917 to control federal agencies from overspending. Have you ever wondered who the government borrows money from? It’s actually from the public, including you and me. When you purchase securities like bills, notes, and bonds from the Treasury Department, you essentially loan money to the government.
What can happen if the government fails to increase the debt ceiling?
The potential economic impact could be devastating, as the government may fail to meet its legal obligations and default. The United States can experience another financial crisis, which could put the jobs and savings of regular citizens in danger. The good news is that this is unlikely, as Congress has always acted to prevent a potential crisis like this. To resolve this type of economic challenge, Congress has temporarily raised, extended, or revised the debt ceiling 78 times since 1960, regardless of the current president’s political party residing in The White House.
When Congress fails to approve a new budget, The U.S. government shuts down. Due to this, any government agency that has not received approval for their spending must furlough their workers. However, they must instruct the employees deemed “essential” to continue working without pay. The good news is that these workers are typically repaid after the issue is resolved. Over the last decade, three shutdowns have lasted for an entire day.
The people depending on Social Security and Medicare payments could also be affected. There is a chance that the federal government can continue making these payments using its tax revenue, but if the shutdown last for weeks or months, it will be much more difficult for the government to send these checks on time.
How can this affect the stock market?
Let’s revisit the 2011 U.S. government default crisis to gain insight into potential stock market outcomes. Some major indexes dropped 20% during this time as the X-date was less than a week away. Furthermore, it is imperative to consider the potential collapse of the $46 trillion bond market in the event of a decline in the values of existing Treasury bonds due to higher yields on new bonds. Also, numerous businesses might experience a halt in growth, which could lead to further harm to the stock market.
How can it affect the housing market?
If the government default, there could be a sell-off of Wall Street which would reduce consumer spending, which would, in turn, hurt business and the housing market. Interest rates could spike, making getting a loan or starting a small business harder. Zillow predicts that if a default takes place, an increase in mortgage rates could pass the 8 percent mark and result in a 23 percent decline in housing sales. This would have a ripple effect on the construction industry and other related sectors.
How should you prepare for uncertainty?
There is a lot of uncertainty surrounding this issue. It’s impossible to predict which payments the government may be unable to make. Therefore, regardless of your circumstances, try to have six to eight months of an emergency fund in place, so you can convert your expenses regardless of what happens in the next few weeks. It is essential to stay informed and calm when making investment decisions. Avoid letting fear guide your choices. It is worth remembering that similar issues have been successfully resolved in the past, and this situation will likely be no exception.
Investing information provided in this blog post is solely for educational purposes. Neither IsaveFuture nor its subsidiaries offer advisory or brokerage services, and we do not recommend or advise investors to buy or sell specific stocks, securities, or other investments.
