The debt limit ceiling is worrying a lot of people. By the end of this episode, you'll know:
What is causing the debt ceiling crisis;
What are the consequences of the US defaulting;
The likelihood that we won't pass debt ceiling relief;
What you can do about it.
Bridget Sullivan Mermel and John Scherer are joined in this episode by Ken Robinson, JD, CFP(R). We discuss what we're telling clients about the debt ceiling, and what we suggest clients do about it.
Ken Robinson is a financial planner in Cleveland OH. For more information, here's his firm's website: https:/p-f-p.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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TRANSCRIPT:
Bridget: The authorities say that if we don't solve the debt ceiling crisis, the US will go into default by June 1st. In this episode, we'll talk about what the debt ceiling is, if you should be worried about it, and what we think is likely to happen. Hi, I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. Today, we're coming to you live from Tucson, Arizona, and the ACP Advanced Planners Retreat. And with us today is our special guest, fellow ACP member Ken Robinson. Ken, thanks so much for being on the show.
Ken: Thanks so much for inviting me. Glad to be here.
Bridget: Great! Okay, so let's talk a little bit about the debt ceiling. First of all, the debt ceiling has been raised 78 times since 1960. So that means that it's happened over once a year. In other words, the debt ceiling needing to be raised is not unusual. In the last 13 times it's been raised, it has become a big political football theater, but I want to talk about exactly what the debt ceiling is, and what the difference is between the debt ceiling and the government shutdown, which was coordinated with the debt ceiling before.
The U.S. Government has a budget, and it's pretty complicated. When they pass the budget, it says, “You can spend.” The different arm says, “Okay, we're going to spend. We're going to get money in, and we're going to put money out. If we're not getting enough money in, we borrow.” And so, we have been running a deficit almost every year since I've been alive. I don't think there's been a non-deficit year since 2003. So we generally are running a deficit and need to borrow, which means that when they need it, the Congress passes a bill saying, “Okay, you can borrow some more to pay for the things that we're obligated to pay for.”
The budget is really not in question now. Sometimes in the past there's been government shutdowns, and that's when they're wrangling over the budget. The government shutdown is saying, “We don't have enough money to pay what the budget is.” They've been taking extraordinary measures to try to bridge the gap, but they are saying that by about June 1st, those extraordinary measures are going to run out and if we don't do something, we would default. Now, let's all talk about default. Default would be bad.
John: Is that a technical term? 😊
Ken: That's the technical financial planning term.
John: What does default mean?
Bridget: It's just like if you're not paying any bills and you're saying, “Okay, I can't pay my bills. I'm not paying my bills.” And so, if you don't pay your mortgage, things happen pretty quickly. For many bills, if you stop paying, things happens fast. So what would happen if we default is it probably spin the entire globe into a financial crisis and a recession.
Ken: And the dimensions of which nobody really knows. The US has never defaulted on its obligations before, and a lot of the world's economy relies on the ability of the US to pay its bills.
Bridget: And the stability of the fact that we keep paying our bills. So if we did default, it would for sure change the interest rate situation. And it would probably take years for people to start trusting the government to pay again.
Ken: U.S. obligations are still generally regarded as among the safest debt instruments you can own: FDIC insured or full faith in credit of the US. Government. And if something we've come to regard as so reliable misses a payment, that's going to be a pretty big deal. What are the exact results of it going to be? I don't think anybody knows.
John: So what do we do about this? I love the background on what the debt ceiling is and how it interacts with the budget. I'm sitting here thinking about how that's all really good, but now I like the action side of things. What are we doing? What are you telling clients? We have just a few weeks until June 1st. It seems like they are taking action. What do we do about it? Should we be afraid? I guess that's one question I hear people asking. And then what do we do about this? Ken, what are you saying to folks?
Ken: Well, I point out, as you did Bridget, that we've been down this road so many times before, and we've never had a default. I don't think we're going to have a default this time because it's mostly about politics. It's mostly about the ability for each side to try to make itself look good or maybe to make the other side, whatever they define that to be, look bad. And trying to second guess what's going to happen in politics is rarely a good way to decide what to do next with your money, because the terrible things we anticipate almost never come true.
And the reason we anticipate terrible things is that this crisis is also good for the news media. But the news media's job isn't to help us make better financial decisions. It's to sell advertising. And if they're going to sell advertising, a good way to do that is to run scary stories. So we have to recognize that those are not meant to be our guides and that the benefit is not to create an actual default, but there's the benefit to the politicians to have a crisis where they can eventually take credit for solving it. So it sounds a little cynical, but…
Bridget: You are cynical. 😊
Ken: I think healthy skepticism is reasonable, and I think the thing to do is not attach too much to this as if it's the end of the world, because I don't think it's likely to be. I think we're likely to have a negotiated resolution like we have how many times before.
Bridget: 78 times. John, what do you tell clients?
John: Yeah, it's largely the same thing that you had said, Ken, and I know we've been down this before—78 times, which is more than once a year—but it still feels new. And we've approached this level several times in the recent past, yet it always feels new. And when things are new, they're scary and there's that tendency to ask, “What do I do about this?”
As I explain it to people, if both sides are in a standoff, they're likely to find some resolution, but if for some crazy reason they don’t, what do we do about that in advance? We literally have no idea. I don't know. Is it financial Armageddon? Is gold even going to be worth anything? You just don't know what this is. And so, you can plan, you can do some things, but you go, “Number one, it's very unlikely to happen.”
Ken: Right.
John: “And number two, we don't even know what the right answer is to do if it were to happen.” And one of my examples I often use with clients is—I can't remember exactly when this was, I think it was about 2011—sometime in the last decade or 15 years we were sort of approaching this spot where things were looking shaky with paying off our debt. And one of the rating agencies, S&P 500 or Moody's or one that rates bonds, instead of being the best classification, which is AAA, (I remember it was on a Friday because I was playing in a golf outing and the news came out after the market closed) the US bond rating was AA+ or whatever the next lower rating is.
And so, I thought, “Holy cow! Monday’s going to be a pretty exciting day in the market. I'm ready to go with questions.” And what happened the next day in the market was money poured out of the S&P 500 and into Treasuries, which we said on Friday weren't as safe as we thought they were. And so, the answer was to take money out of stocks, which were ostensibly doing just fine, and put it in the Treasuries, which were ostensibly not doing just fine.
I mean, can you imagine having your bank and you say, “Hey, Bridget, I think that you're not going to get your money out of your bank. We're not so sure about the security of it.” And your answer is, “Great. Why don't I take my investments and put more in the bank.” That’s literally what happened. And, of course, everything worked itself out, but when I look at that, I think, “If I had known what was going to happen, I wouldn’t believe it.” So you go, “How do you even know what to do?” If there is anything, which I don't think there really is.
Bridget: So for me, what I tell people is first of all, this is something you don't control. You have no control over this. There're many other things that you control. You control your spending; you control where you have your money. So realize that it's in the category of something that you don't control. It’s totally exogenous. You don't control it. But then also ask, “How worried am I about this? Is this keeping me up at night?”
That would be extremely worried. “Is it getting to me?” And if it's getting to you, then my suggestion is to go on a media diet. You'll find out if it happens. Don't worry. I've gone on media diets before, and I find out what's happening. If this is you, you're taking on extra stress that you don't need to have. If it's bothering you this much, you will find out if it happens.
So with that, let's wrap it up. We're at the ACP conference. We're all members of ACP, or the Alliance of Comprehensive Planners, a not-for-profit group that operates with a similar philosophy. I'm in Chicago. I'm Bridget Sullivan Mermel.
John: And I'm John Scherer. I'm from Middleton, Wisconsin. And our guest today is Ken Robinson from Cleveland, Ohio. Ken, if people are interested in getting a hold of you and your firm, how can our viewers get in touch with you?
Ken: My firm is Practical Financial Planning. You can find me online p-f-p.com.
Bridget: Thanks for watching!
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.