Decoding the U.S. Debt Ceiling: Your Essential Insights for 2023

If you’ve been paying attention to the news, you’re likely hearing about the U.S. debt ceiling and the potential for uncertain financial times ahead.

You might be wondering what it means to you and your financial security. Here we’ll break down the details, outline the potential risks, and review a few actions you can take to safeguard your financial well-being.

What is the debt ceiling?

The U.S. debt ceiling is the maximum amount of money that the U.S. government is allowed to borrow to pay for programs and costs approved in its budget, such as Social Security, military payments, and interest on government debt. The debt ceiling is set by Congress, and has been raised or suspended 80 times since 1960.

Currently, the debt ceiling is set at $31.4 trillion. The U.S. government is expected to reach the debt ceiling in early June 2023.

If Congress does not raise or suspend the debt ceiling, the U.S. government will be unable to pay its bills. This could lead to a government shutdown, a default on U.S. debt, or a combination of both.

• A default on U.S. debt is when the U.S. government fails to pay its bills. It would be a major financial crisis. It could lead to a sharp increase in interest rates, a decline in the value of the U.S. dollar, and even a recession.
• A government shutdown is a temporary suspension of non-essential government services. During a shutdown, many government employees are furloughed, meaning they are not paid for their work. Some government services are also closed or reduced. For example, the National Park Service may close its parks, and the Internal Revenue Service may not be able to process tax returns.

What should I do if the debt ceiling is not raised?

If the debt ceiling is not raised, try not to overreact. Keep an eye on the news and stay informed, so you can make sound decisions, protect your investments, and adapt to potential changes in the economic landscape.

Here are a few ways to protect yourself financially during uncertain times:

• Keep an emergency fund. An emergency fund is a savings account that you can use to cover unexpected expenses, such as a job loss or a medical emergency. A good rule of thumb is to have at least 3 to 6 months of living expenses saved in your emergency fund.
• Pay down debt. The less debt you have, the more financially secure you will be in the event of a crisis. If you have high-interest debt, such as credit card debt, it is a good idea to focus on paying it down as quickly as possible.
• Invest for the long term. The stock market may go down in the short term if the debt ceiling is not raised, but it is important to remember that the stock market has always recovered from previous downturns. If you are investing for the long term, it is a good idea to stay invested and ride out any short-term volatility.

What happened to investment markets during previous government shutdowns?

The stock market has tended to fall during government shutdowns. During the 1995-96 shutdown, the stock market fell by about 5%. It fell by about 2% during the 2013 government shutdown, and by about 4% during the 2018-2019 government shutdown.

However, it is important to note that the stock market has always recovered from previous government shutdowns. In the three years following each shutdown, the Standard & Poor’s 500 index rose by an average of 10%.

The debt ceiling is a complex issue. As of the date of publication, we’re still waiting to see what Congress will do. By staying informed about the debt ceiling and its potential consequences, you can take proactive steps to protect your finances and be prepared for what’s ahead.

For an in-depth look at other headlines and external factors affecting your finances, check out the Markets In Focus blog from Q2 2023: Keeping an Eye on Recent Bank Failures and Persistent Inflation.

Investment advice offered through OneDigital Investment Advisors LLC, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital. Any economic forecasts made in this commentary are merely opinion, and any referenced performance data is historical. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. All investments are subject to risk of loss, and any investment strategy may lose value. Past performance is no guarantee of future results.