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The Debt Ceiling and Its Impact on the US Economy

In this episode of Coffee with Brendan, Brendan discusses the debt ceiling, its history, and its impact on the US economy. He also shares the potential consequences of not addressing the debt ceiling, the role of credit ratings, and the risks to both the market and the US as the world reserve currency.


Topics Discussed:

  • Debt Ceiling

  • US Government Borrowing

  • Deficit Spending

  • Credit Ratings

  • World Reserve Currency

  • Market Impact

Transcript:


Hi, and welcome to another episode of Coffee with Brendan. Today's episode is going to be on a pretty complex topic, which is the debt ceiling. So first of all, let's just jump right into it. What is the debt ceiling? So unlike most countries out there, the debt ceiling is a limit on how much the government can actually borrow. The only other developed country that has something like this is Denmark. And it was actually set in place back in World War One to kind of control spending then it was different redefined in World War Two.


But long story short, it has been raised pretty consistently all the way through the 60s, from the 60s all the way through, the only time that we actually had a situation where this country was not deficit spending was back in the 90s, with Bill Clinton and the Republican Congress where they actually generated a surplus. But since that time, we've been pretty much deficit spending and relying on on actually borrowing in order for us to pay our bills.


So let's jump into that. And I think this chart right or this, this, this table here pretty much explains what's going on here and why it's so important that this borrowing thing is taken care of. So this is pretty much the US budget, and what the US but what this is actually saying is that the budget is 6 trillion, or I should say spending is $6 trillion, almost. And of that we're borrowing about $1 trillion. So again, just for those listening out there, a trillion is a 1 and then 12 zeros afterwards. So you could actually say that a trillion is 1 million million. So it's a huge number. And so when people are, you know, when when I hear politicians say, Oh, well, we reduced the deficit. Oh, well, it's reduced from one and a half trillion to 1 trillion. So you just moved from 1.5 million million down to 1 million million? Well, that that that should be celebrated. And obviously, I'm being facetious here. I don't think that's actually the case.


So how does the US government actually fund this borrowing? They issue treasury bills, Treasury notes and treasury bonds. So whenever you buy a treasury bond, you're actually acting as the bank to the US government. And the US government then uses that money that you lend them to fund all of these programs here. And to this point, you know, I think everyone is aware that our our debt is just astronomical, you know, I think it's at this point is that $31 trillion.


So again, 31 million million dollars, is how much we're in debt right now. And the only reason that we're able to, to fund it and to have this kind of weight on our shoulders, is because the interest on that is so small, to this point, interest rates have been very low. And we've been able to keep them low, because at the end of the day, around the world, the US anything US debt is actually considered in investing circles as risk free. And so because it's good, low risk, just like any anyone who's going to, to get a loan, if they're ever in 800 credit score and 850 credit score, you're going to be offered a pretty low mortgage rate, for instance, if you go to the bank to buy a house, but on the flip side, if you're not a very credit worthy borrower, like in the case of Greece, then your interest rate might be a whole lot higher, because the bank is obviously going to require a higher interest rate in order to lend money to you because they because you're more risky. And so to this point, the US even with this gigantic debt, is still considered one of the most credit worthy organizations or entities out there. And so our interest on this gigantic amount of debt is only 8%.


Why is this so important? This whole debt ceiling and not blowing up? Long story short, let's do a little history lesson back in 2011. The same issue came up where there was a lot of head banging between a Republican Congress and President Obama where they were banging heads and posturing. And we came very close to hitting the debt ceiling. And eventually we actually didn't, we actually avoided it. But in the process, and I'll share something here with you, in the process, one of the three rating agencies that oversees us, actually downgraded the US debt. So this is a CNN article from August 6 2011. And August 6 2011. What they actually pointed to, as the reason they downgraded it, is that, in their opinion, they didn't think that Congress and President Obama at the time,could came up with a good plan necessary to stabilize the government's medium term debt dynamics.


But they went even further. And this is where I think we have a lot of parallels to where we are today, in 2023, they actually stated the political brinksmanship of the recent months highlights what we see as America's governance and policymaking becoming less stable, less effective and less predictable than we previously believed. In other words all the back and forth, and hair pulling and debates that happened in 2011, led to the downgrade. Now, the other two rating agencies did not downgrade. However, in 2023, another one of the rating agencies said, if we have another repeat of 2011, we also will downgrade.


And so going back to our our chart here, that I think is the key chart, if if the United States gets another downgrade, again, just like being a bit, you know, having a low credit score, if we get downgraded and our credit score goes down in the eyes of folks that are going to borrow from us, then this net interest, we're going to have to charge more, or we're going to have to offer people who are going to finance the US debt, a much higher level because we're not as credit worthy as we were a moment ago.


And so this is what the stakes are if this number, this this line item here, the 442, let's say doubles, because now, people don't want to don't see the United States as risk free anymore. Because again, that's what's at stake here. If we can no longer issue debt, and we miss payments and miss interest payment payments on the debt that's out there, we're gonna be looked like we are a delinquent borrower, you know, just like if you skipped your mortgage payment, you know, the bank does not look very kindly on that. And they could increase your your interest rate. And that's exactly what could happen here in the in the US government. And so that's what's at stake right now. And that's why this is such a big deal.


Going back again, to 2011. What actually happened? Well, in the span of 21 days, the s&p 500 dropped 16% as a result of that, that credit downgrade. So this is huge. And this could have huge implications not only for the, for the market, but also for our standing in the world. They're all they're all ready countries like Russia, Brazil, India, China, that are all trying to come together and create a new, as they call it, world reserve currency, that's equivalent to the way that the world looks at the US debt is that it is risk free. If we continue to do this, and you know, our credit score continues to go down. Other countries can step in and then become the world currency. And that would again, make that $31 trillion of debt that we're we have on our shoulders, unbearable, right? Now, it's bearable, because only 8% of our overall budget, but if it starts getting to 16 to 20%, because of the interest rate that we have to offer to potential lenders, is that much higher, because we're not credit worthy anymore. That's where this whole house of cards kind of comes crumbling down.


So again, long story short, I trust that there's going to be a lot of letters that are being written to congressmen, to the president, etc, etc, saying Don't let this happen. Don't dig your heels in. But again, the reality of the situation is the two major players here, our speaker of the house, McCarthy and President Biden, both of whom are on thin ice, you know, Biden has got a very low approval rating and McCarthy just barely got the nomination from his party. So both of them have really had to make some political gains and raise their political capital in the eyes of the voters. And, you know, again, that's what concerns me is that there are two, two men that have a lot to lose if they give in. And so they're going to take some pretty hardline stances on this.


So more to come on this, but definitely buckle your seat belt. If if, if, you know in the short term, you know, the two sides come together and resolve this, then the market may actually celebrate it in the market may actually go up. But on the flip side, if this does get down to the wire, and we get we have another repeat of 2011 Buckle your seat belts because it could get rough. I wish I had some some more positive news. But definitely, if this is something that's very concerning to you, and you're worried about how you're positioned with your portfolio, definitely give us a call schedule a meeting and we can talk about the risks to your portfolio. So thanks for listening, and we'll see you next time.




Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.


Securities and advisory services offered through LPL Financial,

a registered investment advisor. Member FINRA/SIPC.


The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents in specific states which are listed on our website at www.waymarkwealth.com


The opinions voiced in this video are for general information only and are not intended to provide specific advice or recommendations for any individual.


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