It's hard to escape the debt ceiling news articles.

What happens if the U.S. defaults on their debt?

The truth is...nobody knows.

A good portion of the financial system is built on the idea that U.S. Treasuries are considered the "risk-free" rate.

I was taught this in school. Financial markets operate off of this assumption most of the time. News articles talk about how the return is considered risk-free because payments are backed by the full faith and credit of the United States government.

What's Happening?

The government is reaching the maximum amount they are allowed to borrow until Congress approves them for more.

It's a little like reaching the limit on your credit card and needing to go back to the credit card company to ask for more, except in this case, you can create your own money, so it's not a concern about where the money is coming from — just that someone needs to approve it.

Congress has increased or suspended the debt limit 78 times since 1960, so this is a fairly common occurrence.

Technically, the federal government hit the debt limit in January, but extra measures were taken to keep the bills being paid. It's estimated that the current funds will run out as early as June, but it could be later in the summer.

Why Is It A Concern?

It's a concern because the debt ceiling is a political fight.

Lawmakers cast a vote, and many don't want to be seen supporting more federal spending. They also take this "opportunity" to put their own priorities onto bills.

The last time we saw a serious concern about the debt ceiling was in 2011.

A deal was reached at the last moment, but the stock market went down significantly and Standard & Poor's (a ratings agency) downgraded U.S. government debt for the first time.

Where We Go From Here

The U.S. government has been able to easily sell Treasury bonds because the U.S. has never defaulted on debt.

If the U.S. fails to make payments, that would open a world of possibilities — many that probably can't be put back inside of a box.

Although nobody knows what will happen, if the U.S. government defaults on the debt, there will likely be chaos across the financial system and depending on how long it lasts, a higher unemployment rate and other serious consequences.

U.S. Treasuries are used as collateral across the financial system, and if they are no longer seen as safe, everybody may demand their money back at the same time (kind of like a run on a bank, but on a global scale).

Am I Making Changes?

No.

(Full disclosure: I put in a request to rollover an old 401(k), which means a portion of my net worth will be in cash at some point, but this has been in the works for weeks, and I plan to invest back into the market as soon as the funds are deposited. I also didn't anticipate my plan administrator taking 7 to 10 business days to process the request. *eyeroll*)

I have an investment policy statement. My time frame for using the funds has not changed. There is no reason for me to make a change.

Although the U.S. government defaulting on their debt is a serious concern, there is nothing I can do about it. It has always been resolved, and I have no reason to believe it won't be resolved again.

I have very little confidence in politicians, but I do have confidence that as we get closer to the deadline and consequences start appearing, they will come together because the alternative is horrible for everyone.

I believe no politician wants to be seen as the person who sent the U.S. spiraling into an economic catastrophe and lose their own power and wealth in the process.

I could be wrong, but there will always be a concern on the horizon.

The best I can do is make a plan and invest for how I plan to use the funds — not based on external factors.

When times get tough, I recommend getting outside. Take a walk. Be active. Spend time in nature.

I hope you have a good week!

Blog This Month

​What Is It Like Working With a Virtual Financial Planner?​

What I've Been Reading

• ​NYTimes: The Debt Ceiling Dispute Raises the Risks for ‘Risk-Free’​
• ​"Glass Half-Empty" Investors - The Big Picture​
• ​Opinion | What would happen if the US defaults on its debts?​
• ​Where to Invest in Real Estate in 2023: Housing, Office Reits​
• ​Explainer: How are money market funds preparing for a potential debt ceiling​

Resources

​How to Manage Your Resources for Widows - Hear directly from widows about the decisions they had to navigate, how they lived with grief, and the wisdom of what they want you to know after reflecting back on their experience.

​Widows and Money Facebook Group - A community to learn about money, feel empowered around your finances, and ask financial questions.

​More Than Money: Real-Life Stories of Financial Planning - Stories about the impact and value of financial planning. My story of Sara and Leo is on page 205.