Why is the US debt limit a cause for concern?

The potential consequences could be dire if a compromise on debt limit is not reached. Both sides of the debate have their own concerns, but it is important to understand the issues at hand. Fortunately, Washington typically resolves the matter in the end.

The debt limit issue can be a problem for the stock market because it creates uncertainty and instability in financial markets. If the government is unable to borrow more money to meet its financial obligations, it could be forced to make spending cuts (such as close parks, lay off workers, shutter agencies) and delay payments (obligations to other countries, businesses, and people), which could have negative consequences for the economy and for businesses that rely on government contracts or payments.

Additionally, the debate over the debt limit can create political uncertainty, which can cause investors to become cautious and hesitant to invest in the stock market. This leads to market volatility and a decline in stock prices. The market hates uncertainty.  Why?  If you aren’t confident in the outcome, are you going to invest your money?   Would you keep going to work if you were uncertain that you would be paid?  The market hates uncertainty and prefers companies that are reliable, have good products, and pay their bills on time.  The US Government has even more influence on those factors because it can influence the entire economy.   

In addition, if the government were to default on its debt, it could have severe consequences for the global financial system and the US standing as the best investment in the world. The U.S. dollar is considered the world’s reserve currency, and U.S. Treasury bonds are among the safest and most reliable investments in the world. A default on U.S. debt could lead to a loss of confidence in the U.S. government and the U.S. dollar, which could have serious implications for the global financial system and the value of US stocks and other investments.  Would you loan money to someone who has defaulted on recent bills?  It would take years to regain trust and hopefully no other country appears a better investment. Most would rather loan to someone that pays their bills.  

Overall, the debt limit issue can create uncertainty and instability in financial markets, which can have negative consequences for the stock market and for investors.

Maybe Washington should read about creating a financial plan by the Fiscal Investor.

More to come by June 1st….