The government is about to bump into its debt ceiling and how they deal with it can have big implications for your finances
Speaker 1 (00:07):
Welcome back. It's 30 Minute Money, the podcast that delivers action-oriented smart money ideas and little bite-size pieces. We're in Rochester, New York, and our Bushnell Basin Studio. My name is Scott Fitzgerald and I'm joined by Steve Wershing of Focused Wealth Advisors. How's it going? Hi, Steve.
Speaker 2 (00:23):
You Scott. It's good. How are you?
Speaker 1 (00:24):
I'm, I'm doing great. Uh, we're, you know, we're, we're trying to figure out this whole debt ceiling thing
Speaker 2 (00:29):
Speaker 1 (00:30):
Well, which I thought was just another name for my roof that I just bought, but
Speaker 2 (00:35):
Yeah. Team, not your personal debt crisis. Yes. But the federal government's debt crisis, which unfortunately is all of our debt crises. Right,
Speaker 1 (00:43):
Right. So let's, let's go into that. What, what, what does debt ceiling mean to you?
Speaker 2 (00:47):
Yeah, right, exactly. And so the, the, you know, you've probably seen in the headlines that there's all this argument going on in Washington about, about the debt ceiling and how we're gonna bump into it and how we need to expand it, and that kind of stuff. And, you know, the, the, the issue is that, you know, there's a law, there's, you know, that, that says the government is only allowed to have a certain amount of debt mm-hmm. , that they can't go beyond that. Right. Which is a little strange because there's no limit to saving, or I'm sorry to spending, and we'll get back to that in a little bit. So, um, they can spend as much as they want, but the government's only allowed to take up to a certain amount of debt, and then it has to stop. And we're rapidly approaching that level. Actually, we've exceeded the level, but, uh, the treasury has a couple of little tricks in its bag that it can pull out, and it's done that, and it's looking like, you know, it may bump into the hard ceiling, like they're gonna be out of tricks, you know, maybe as soon as June one. And the question is, so what does that mean to us? And that's what I wanted to talk a little bit about, because it could mean something to all of us who are trying to, you know, save for and fund our retirements.
Speaker 1 (01:57):
Yeah. And of course, that's pretty much been in the news for, uh, for a while now. Yeah. You know, we're recording this in May. Yep. And we've been hearing about it for at least a year, I think. Yeah. Quite, quite some time. Yeah, exactly.
Speaker 2 (02:10):
It's the slowest train wreck in history, . So, so, you know, so the, the, so let, let's just, let's just sort of start at the beginning, you know, is it why, so why do we have a a debt problem and why do debts rise? And of course, it's because government spends more than it takes in, you know, it's not a hard concept to understand. Um, but the, uh, one of the, one of the challenges is that, um, you know, there's this timing issue that the government doesn't necessarily get all of its income consistently through the year. Um, and it doesn't necessarily spend all of its money consistently. There are, you know, it's lumpy. There's, there's high, high, high parts and low parts. And so the timing of that, those income and expenses, um, has, you know, has a lot to do with, you know, the, the, the federal debt going up and coming down. But really, again, the, the, the challenge is the pr the reason that we have this problem is that there's this structural overspending that we have. So, as an example, in 2022, the government took in 4.9 trillion. That's through all of its sources, all of its taxes and other revenue generating activities, but it laid out 6.3 trillion. Hmm. And so, you know, we're just systematically driving that debt higher and higher.
Speaker 1 (03:29):
So the debt goes up more than overspending.
Speaker 2 (03:33):
Yeah. And that's the, that's one of the really confusing parts. So you might hear about the federal deficit, the deficit is the amount by which the government spent more than it took in, but that actually is not the whole story, and that's never
Speaker 1 (03:46):
Speaker 2 (03:47):
Exactly right. It's be, and it's because there are some things like things called special appropriations, um, and those are things that are not captured in the federal budgeting process. So the Congress publishes a budget, and that's what's supposed to govern how much it spends. But there's stuff that doesn't show up there. Like, notably, a bunch of years ago, the wars in, in Iraq and Afghanistan were, were all done on special appropriations. So they were beyond the budget. And so, um, there's this disconnect, and the disconnect can be pretty big. It in, if we go back to look at history, for example, back in 2008, the deficit when you, when they reported it at the end of the year, the deficit was $55 billion. So theoretically, anyway, the government, according to the budget, uh, spent $55 billion more than it took in. But when the congressional budget office actually published the statistics for how much money actually went out, for how much they over they spent, over what they brought in, it was actually a, a trillion dollars that was added Wow.
To the national debt. And for a while, there were some rule changes under President Obama that sort of tightened that up. And, and in fact, in 2013, they were really pretty close. They were just, you know, a couple of billion. And and this is like the, the, the bizarre part of federal budgeting is you and I can talk about billions as being close, but , we, we got within a couple of billion dollars, but then since then, it's, it's diverged, you know, back out again. And so back in 2014, the deficit was, um, the deficit was 83 billion, but again, they added more than a trillion dollars to the federal debt. So it's, it's, it's worse than it actually sounds.
Speaker 1 (05:37):
I I find this interesting because it almost seems like they, they set these limits, but they're just kind of more suggestions. Right.
Speaker 2 (05:45):
Exactly. Than anything,
Speaker 1 (05:46):
Speaker 2 (05:46):
Know, I try to tell that to the state trooper when he pulls me over. It's like, you know, I see the speed limit, but that's just advisory, right? I mean, that's not a really, like, that's not a hard limit. Is it and he's just not buying it. Right. Right. You know, maybe we should spend some, send some of those guys down to Washington and take care of this. But, but that's the whole thing, right? Is is that we've seen this over and over and over again, that, you know, that they, they, they, they pass a regulation, they pass a law that, you know, well, we're only gonna do this much, or we're gonna limit it by this much, or those kinds of things. And of course, they just, as soon as, as soon as the opportunity pops up, they just blow right through 'em.
You know, I've, I've said it before and we'll probably say it again, that, you know, giving money and power to politicians is like giving whiskey and car keys to teenage boys. Yeah. . It's just, you know, you, you're not gonna like the outcome. Exactly. And, but that's, but that, that's where we have the problem is that, you know, there have been plenty of times they're, they set the debt ceiling, but you know, they, they have a tendency to blow right through it. Just like many times in the past they've had, I'll put it in quotes, bu balanced budget acts where, you know, they're only supposed to budget for the amount of money that's gonna come in. It never works out that way. Yeah. And they've, you know, they've, they've tried all different approaches to it. It might last for a year or two, couple of years, but then they blow right through it again.
So what is the debt ceiling then? What exactly is that? Yeah, so the debt ceiling is the amount of, of credit that they're allowed to have all together. The amount, the amount of, of total money that they owe is supposed to be a hard number. It would be a little bit like when you apply for a credit card, there's a debt limit, right? So if you apply for a credit card, it might be 5,000, 10,000, 20,000, whatever it is. Mm-hmm. , if you try to spend beyond that, they'll start denying your card. Right. And that, so that's, that's your personal debt limit. And that's kind of what the federal government is supposed to have, is that when they added up all of the outstanding treasury securities, the, the treasury bills, the treasury notes, the, uh, treasury bonds and all the other, all the other debts of the government, it's only supposed to come up to a maximum number.
And that's where it's supposed to be limited. Now, technically, we actually are past that debt limit now. We actually hit it January 19th. But as I said, there are some, you know, fancy, there's some fancy accounting, some, some fancy bookwork that, that the treasury can do to extend it. If you or I did that, you know, we'd go to jail . But, you know, the federal government's allowed to do that. And, um, and so the, you know, the question is when they run out of those tricks, and when, you know, treasury secretary, Janet Yellen came in and said, we think we might actually hit that by June 1st, it actually took a bunch of people by surprise, it took, it took Congress by surprise, because they weren't expecting that, that it would happen that fast. Yes. They knew that we passed the limit on January 19th, but they thought that we could do some of these, you know, bookwork, you know, bookkeeping, slight of hand tricks. Right. You know, to, to extend it beyond that. But that's, that's what it's looking like, is around, is around June 1st, they'll actually bump into that hard ceiling.
Speaker 1 (08:59):
And the big question really is what happens? It's, it's never happened. So we don't know what the result will be when it actually does, or if it actually does happen.
Speaker 2 (09:07):
Exactly. Exactly. We've, we've never, we've never actually hit it before. And I mean, there have been a, a few times when we've come close and there have been these last minute negotiations, but we've never actually hit it. And so the question is, you know, when you ask the question, what will happen? Well, we don't really know. And it's not just, I mean, there are a whole bunch of things that, that we, that we can know, you know, that we have, they, they have to stop sending out checks, right? So if you're on social security, if you get a federal pension, if you get a lot of those kinds of things, then they would stop. And if you're getting payments from the federal government, that would stop.
Speaker 1 (09:44):
Speaker 2 (09:45):
Yeah. But, and so, you know, that that's the really, that's kind of the reprehensible part of it, is that, you know, people who have been paying into Social security all their lives, you know, they run the risk of not getting a check. And, you know, social security checks are a really significant part of a lot of retirees income. And here they could just be, you know, left out in the cold. But that's not necessarily the biggest issue. The biggest issue is, um, what happens if, uh, well there's, there's a bigger issue, which is there are a lot of loan provisions that comp in company documents and those kinds of things that are, that are based on continuing payments. They might, they might be collateralized by Treasury securities. And if the payment stopped, then technically all of those loans would be in default. And so we could be, you know, we're talking multinational corporations or even parts of the government that, that all of a sudden those loans could be in default and usually in a loan contract.
They're all kinds of clauses in there about what happens if you go into default. And those would be really ugly. But the biggest issue of all potentially is that, you know, the, the, the, the, the American dollar is the reserve currency of the world that it's considered to be the most stable, the most solid. And so a lot of the world's economies are kind of based on, you know, what happens with the US dollar. And because every, the, the, the basic understanding is no matter what happens, the United States government's gonna make good on its debt, it's gonna pay its bills. And if you, if you throw that into question, then, you know, all kinds of crazy, unpredictable things could potentially happen. Um, you know, if you really go to the extreme, it could be that we lose our, we lose our leadership position in the world that, you know, it, people might start looking at China or other countries as well.
If we can't rely on the US Treasury to pay its bills, maybe we need to figure out some other country to base it on. I don't think that would happen. It would be really hard for that to happen, because there are all kinds of questions, of course, about, about China with, you know, the, the level of government inter intervention in that economies, uh, in that economy, and that they don't necessarily prescribe, you know, subscribe to general, generally accepted accounting principles like we do. But it really, you know, it, it's, it could cause all kinds of terrible things, not the least of which would be that it would be more expensive for the government to fund stuff. So if investors of all, if institutional investors began questioning the cash flow that comes from treasury securities, then interest rates are gonna go up further because they're gonna say, listen, we, we consider this to be a risk-free in, uh, device, a risk-free loan. If it's in fact not risk-free, then we're gonna have to get more interest for us to give you our money. And all the, you know, so first it would be more expensive to run the federal government because those interest rates that go up, but then all of the things that are based on the treasury, so credit cards and variable rate mortgages and all those kinds of things could get more expensive too if treasury rates have to go up because people lose confidence.
Speaker 1 (13:01):
Man, that is, um, there's some scary things in there. Yeah, yeah. Some people might panic, but you would suggest they don't.
Speaker 2 (13:09):
No, I su I would suggest that they don't, and you know, we, it, it's important like, you know, the major money center banks have to develop a strategy for what would happen if in fact they defaulted because, you know, uh, it's their responsibility, their legal responsibility, their fiduciary responsibility to have contingency plans. What I will say is, I think it's extremely unlikely to actually happen because everybody in Congress is being advised, and the president is being advised that all of these bad things could happen. So what I think is most likely to happen is that there will be a whole lot of rhetoric going back and forth and a whole lot of posturing and that kind of stuff, but in the end, they'll work out some kind of a deal. It might be at the 11th hour, but they'll work out some kind of a deal, uh, to make sure that, that we don't actually default.
I mean, in the end, it's kind of a silly argument because it's not the debt ceiling that's the problem it's spending. That's the problem. And until we atta, you know, it, the whole, the whole idea about, you know, should we expand the debt ceiling, it's a little bit like if you had a credit card and you went like on a shopping binge, and you spent all kinds of money, and then you get the credit card bill and you, and you start debating whether or not you should pay it . And that's kind of what we're doing. Right. That's crazy. Yeah. I mean, that's not, that's not the problem. The problem is not that you got the bill, the problem is that you ran it up in the first place. Right. And that's the same thing with the federal government. And, and until we get our spending under control, this, this whole, this whole argument is just, it's a little bit ridiculous because there's too much at stake for us to stop paying people because we have this arbitrarily chosen level that we decided to put on it. So
Speaker 1 (14:57):
Is there something that, that, that us average John Q public can do to, to sort of hedge our bets, for lack of a better phrase?
Speaker 2 (15:06):
Yeah. So that's, that's, I think that's the more important question. The, the, the, I don't think the question about whether or not it's gonna happen is the big one. Um, but the bigger question is what can you do? Yeah. Uh, how should you prepare? And if so, how should you prepare? Right. And so first, the first thing I would say is, as bad as these possible outcomes are, um, we shouldn't panic about it, just like you said before, it, we don't want to, you know, suddenly be pulling a lot of money out and hiding it, or, you know, investing in strange things that, that you might think might preserve your, might preserve your wealth. If, if any of this happened, I, it's important that we not go that far, because if you turn your whole long-term investment strategy upside down because you're worried about what's gonna happen at the federal government, it's probably not gonna be a good outcome for you.
Uh, there are some things that you can do. So one thing that would be a good idea is increase your cash reserves. So, um, not radically, but, but bump them up a bit. So if you have three months expenses set aside in a bank account so that you can keep paying your bills, you know, if anything pops up, well maybe expand that to five or six months. If you have six months, then expand it a little bit further. But just raise a little bit of cash so that if anything does come up to interrupt your cash flow or increase your costs, that you've got the funds to cover it. This is especially true if you're receiving social security, if you're receiving a federal pension, if you're receiving money that's coming from the federal government that is meaningful to you being able to pay your bills, then raise some cash and just give yourself a little bit more leeway so that you can cover bills for another month or two.
If anything, if anything pops up, we should also keep in mind that, as I said, that if, if people get nervous about the treasury's willingness to pay their bills, it will drive up interest rates. So take a look at your debts and anything that is adjustable, anything that's contingent on federal rates, you may want, you might want to take a look at your options, either pay some down, if that's possible, or maybe refinance to a fixed rate. Not necessarily a great option because interest rates are a lot higher than they used to be. But you know, you'll wanna build into your budget, uh, potentially build into your budget the possibility that those bills could go up, that you might have to pay more on those things. And the other thing that I'll just throw in here, this is not a financial concern of course, but we have this whole problem because Congress spends money.
So call your Congress people, call your representatives, tell 'em how irresponsible this is. Tell 'em how angry you are about the fact that we're having to face this again, and that that's probably gonna affect your decision. You know what decision you make next time you vote. They listen to that. If they get letters, if they get phone calls from you, they keep track of that. And that's, you know, again, that's not financial advice, but, but I think that that, but that is something that, that everybody can take action on. If you're a registered voter, let 'em know in Washington about your displeasure about this whole thing.
Speaker 3 (18:19):
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Speaker 1 (19:45):
All right, so the debt ceiling. What is your 30 minute action item?
Speaker 2 (19:49):
So the 30 minute action item this time is review your income sources and your debts. If you have any income that's coming in from federal government, make sure that you've got some extra cushion to get through it. And if you've got debts that are, that are, uh, connected to federal, uh, that have adjustable rates, make sure that you've got a little bit of extra room in your budget in case those payments go up a little bit.
Speaker 1 (20:13):
And of course, you don't have to go out and buy that bunker that we were talking about earlier, ,
Speaker 2 (20:17):
That would not be one of my recommendations. ,
Speaker 1 (20:21):
Thanks again for checking out 30 Minute Money. You can find us on all the major podcast platforms and, uh, Steve Wershing can be found at focuswealthadvisors.com. And I am at email@example.com. If you have any needs for podcasting or anything that I do, please come back and join us next time on 30 Minute Money.