Congress Attacks America: How to Prepare for a Debt Ceiling Disaster

If I wasn’t seeing it with my own eyes, I wouldn’t believe it.

Congress is once again using the debt ceiling as a negotiating chip in a game with the highest possible stakes — the world economy.

Raising the debt ceiling allows the government to borrow more money to pay for spending Congress has already approved. Not raising it ultimately means bills going unpaid. To understand the ramifications, see our recent post, ”9 Things You Need to Know About the Debt Ceiling.” But in essence, without an increase, our nation will be unable to pay its bills, undermining both our credibility as a country and the worldwide financial system.

How does that translate to Main Street? In the worst-case scenario, a stock market crash and higher interest rates on everything from credit cards to mortgage loans. That in turn would slam the brakes on business, increase unemployment and potentially push our economy into recession.

While this is the scenario many envision, some disagree. In a USA Today article called ”Debt Limit Breach No Big Deal, Some GOP Lawmakers Say,” U.S. Rep. Ted Yoho, R-Fla., said, “I think, personally, [reaching the debt limit] would bring stability to the world markets.”

Rep. David Schweikert, R-Ariz., said:

I will hear language like, “Well, we are heading toward the debt ceiling and you are going to default.” Anyone that says that is looking you in the eyes and lying to you, either that or they don’t own a calculator.

But most experts you’ll find quoted in sources ranging from CNNMoney to The New York Times agree with the opinion that a default would be disastrous.

Financial calamity is typically something that happens suddenly, its causes only clear in the rear-view mirror of history. Not so with this potential nightmare: We can see it coming. So is there anything you can do to protect yourself? Let’s examine the options.

Option 1: Do nothing and hope cooler heads prevail

It’s important to distinguish between failing to raise the debt ceiling by the day it’s reached (estimated to be shortly after mid-month) and the United States actually defaulting on its obligations.

It’s not Armageddon if Congress misses the deadline by a few days, or possibly even a couple of weeks, especially if a compromise is clearly on the horizon. It’s when the U.S. actually fails to pay an interest payment on its debt or other bills that the financial world begins to unravel.

Many experts have argued that while the former scenario is possible, the latter is highly unlikely. One of many examples: Last week legendary investor Warren Buffett said on CNBC, “We will go right up to the point of extreme idiocy, but we won’t cross it.”

If you fear a financial meltdown, there are things you can do. (More on that in a moment.) But remember that although stupidity seems to be running amok these days, the U.S. has never defaulted on its debt. And while there may be some in Congress who think this would help their political careers or “bring stability to world markets,” they’re the exception, not the rule. Odds are that one side or the other will blink.

Option 2: Sell, sell, sell

In the commonly accepted scenario, a U.S. default would result in a collapse of both stock and bond prices, decimating many 401(k)’s and other investment accounts. To be on the safe side, you could get out of the way now by selling securities and holding cash until the crisis is resolved.

The problem with this approach: If you’re wrong, it’ll cost you.

The most likely scenario is a deal will be reached. When that happens, the stock and bond markets will probably celebrate by going higher. So while there’s risk in staying in the game, there’s also risk in remaining in the dugout.

Option 3: Don’t sell, but hedge your bets

“Hedging” refers to taking an investment position that will gain in value if your primary position goes bad.

For example, if you look at my online portfolio, you’ll note I currently have about $200,000 in stocks. But I also hold an investment in gold: SPDR Gold Shares. I don’t think gold is a great investment, but if something like a major war or debt default happens, my stocks will get crushed, but the gold would probably go up. Thus, gold is a hedge against my bet on stocks, which are a positive bet on the American economy.

There are numerous other ways you can hedge against a default, including raising cash, shorting U.S. Treasuries in the futures market or with ETFs, and moving out of small stocks to the biggest – thus safest – U.S. companies.

An investment hedge, however, can carry the same risk as insurance. If the disaster you’re insuring against doesn’t materialize, you’re out the premiums you’ve paid.

What I’m doing

When it comes to investing, I’m so boring, paint could watch me dry.

When you looked at my portfolio, you may have noticed the last stock I bought was Ford, back in 2011, and most of my portfolio was purchased in 2009. The market has had lots of scares since then, as well as ups and downs. So why don’t I buy and sell?

For the answer, look to one of the few stocks I did sell: Bank of America. I bought it in 2008 for $14. I sold it to take a tax loss in November 2011 for $5. My intention was to buy it back 30 days later; any sooner and the tax loss would have been disallowed. But did I? Nope. And now it’s back to $14.

The point is, I’m not smart enough to time the market. So unless something’s both catastrophic and certain, I’m unlikely to either sell, sell, sell or put on a substantial hedge. And while I do believe that a debt default would be catastrophic, so far it’s not certain. 

So I’m not doing anything with my existing investments, at least not yet. Here’s what I am doing:

  • Raising cash. Should the worst-case scenario occur, cash will be king. I’m keeping as much of it around as possible.
  • Scouting potential investments. Thanks entirely to Congress, the market’s been falling daily. Soon there will be bargains. If we don’t default, I’m a buyer.
  • Taking names. This article should never have had to be written. I won’t forget those in Congress who created a national crisis for their personal political power. I will do everything possible to see they’re gone at the earliest possible moment.

Sign up for our free newsletter

Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's '205 Ways to Save Money' as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash. It doesn't cost a dime, so why wait? Click here to sign up now.

Maximize your savings in seconds

Search the fast, free Money Talks News savings search.

Click here for our free search tool.

Even if you're getting a great rate on your savings, it's always smart to see what's out there.

In seconds you can search hundreds of financial institutions for checking accounts, CD's and money markets. Take a few seconds right now and see if you can earn more.

Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • Angela Morales

    Stacey,
    Where can we find the names of the politicians who are responsible for holding the American Economy hostage?
    Angela

    • Stacy Johnson

      Unfortunately, that seems to be a matter of some debate, at least for some.

  • Cindy Kadinger

    you’re stupid

  • Joseph Freitas

    Stacy, how can a website that Stresses financial responsibility and solvency argue with a straight face that continuing to spend more than we make is the right thing to do. I am really starting to lose my interest in this site because you obviously aren’t as intelligent with money as you like to think. Tell me how you can in one breath tell everyone on an individual level that they need to control their spending, pay down debt, have a savings, etc… and then in the next breath tell us if we as a nation don’t borrow more money it will be a disaster?
    I am just looking for a little consistency here. I understand the spending was already approved. Hell, my decision to own a Bugatti was also approved, but guess what I don’t have the money to buy one. Do you see my point here.

    • Stacy Johnson

      Joseph, In no way, shape or form do I approve of deficit spending, for government or anyone else. It’s irresponsible, but more to the point, paying interest is a horrible use of money. Unfortunately, however, defaulting on our debt isn’t the way to solve this problem. I don’t want to see the market crash, I don’t want to see the economy tank and I don’t want to see more unemployed Americans. What I would like to see is the debt ceiling raised so we can pay our bills, followed by bipartisan reductions in spending sufficient to keep us out of this mess in the future. Make sense?

      • Joseph Freitas

        I agree completely with that assessment Stacy, and thank you for your response. My only counter is to say this was the argument during the last debt ceiling argument, and the one before that. At some point we have to stop kicking the can down the road. That is what this is whole thing about. Forcing a discussion, and a agreement to remain solvent going forward.

        • Stacy Johnson

          I completely agree, Joseph. What’s dangerous – and should be unnecessary, in my opinion – is for Congress to threaten default to force a discussion. But I least I get it. And it’s not without precedent. What was scary this time around, however – and completely crazy – was one side threatening default if the other side didn’t effectively repeal an unrelated law.

          • Joseph Freitas

            Agreed. There should be a comprehensive approach to the entirety of our spending where we evaluate what is necessary vs what is discretionary. I also feel it is important to take an honest look at what can private industry do better than government and outsource these services in an attempt to make the most of the necessary dollars we spend.

    • Cheryl

      You don’t have a point. There is no deficit, at least none that we haven’t had since government began. The only reason it’s an “issue” now is because the tea party (read the koch brothers wherever you see “tea party”) has directed the GOP to make it one. Stop buying that deficit crap and start asking the correct questions…..PEOPLE make the economy work by spending money, that simple. If they aren’t making money, they can’t spend it. You might ask the republicon party how sending millions of jobs to China and points east, weakening the working force in America, giving massive tax cuts and subsidies to the ultra wealthy, and depriving Americans of vital services make a strong country. I repeat, there is NO out of control spending – that’s republican propaganda. Did you hear any of that “out of control deficit” talk when bushie was spending money we DIDN’T have on his illegal wars, giving it away to big oil, pharma, or the for-profit health insurance conglomerates? HELL NO! Get smart and get educated.

      • Joseph Freitas

        Lady, you are the reason there should be an IQ test before you are allowed to vote…

        • Dennis Thompson

          Cheryl, you are misinformed, do your unbiased homework and then make your statement(s) on fact, not emotion.

  • lonsterthemonster

    I hear you Stacey! The American people need to take names. Where can we get a list of those republicans shutting our government down???

    • Joseph Freitas

      Here is the short list. Barack Obama, Harry Reid, Nancy Pelosi. Your welcome :)

      • TeeTime

        What! The republicans can’t possibly be blame- free in all this! What about Sen. Cruz of Texas, Rep. Mark Meadows of NC, or Sen. Rand Paul of Kentucky, or Sen. McConnell of Ky? Sen. Cruz and Rep. Meadows and their Tea Party supporters would have no problem at all collapsing our economy to make a political point. The point is, the ACA is the law, passed by both houses of Congress, validated by the re-election of President Obama, and declared legal by the Supreme Court. The republicans have been invited to negotiate changes to the ACA, to offer input to make it better, with no results. The Tea Party faction is holding Speaker John Boehner to non- compromise on this issue by threats of having him removed as House Speaker. The republicans could stop using the national debt ceiling as a cudgel to get their way and work to change the ACA through normal congressional processes. Laws can be modified, changed, or repealed, but they should not be used to hold the country hostage in times of financial uncertainty like these. What responsible President would allow that to happen and set a precedent for future irresponsible acts? The Tea Party is proposing rule by the minority.

      • 8317dh

        Joseph,
        Incorrect! (my opinion.) Congressional Republicans are partly – if not completely – at fault for the gridlock.

        • Joseph Freitas

          I can see your point. However, I remember back to the last debt ceiling fight a year ago. When the Republicans gave in to the raising of the ceiling that time in exchange for some reform and spending to take place before they would raise the limit again. They had a full year to do this, and they did not. They waited purposely again until the last minute so they could use this to blame the Republican house. This deal was worked out a full year ago! With that in mind, who really shut the government down? The agreement made last year, that apparently no one remembers, is the key point. If spending had been reduced there would not be a fight.

  • Cindy Kadinger

    I just stopped my subscription and by the way you’re stupid too.

  • Roxana

    I am curious with a follow up article about the housing market. I know it has been on the upswing here lately and that interest rates are on the rise. However, with 401k’s and the stock market predictions you have in this article, does this mean that the housing market will bottom out again just like in 2008? Is this one of those things where if you’re planning on selling, maybe you better make arrangements to sell sooner? Thanks so much for your information and opinions. They are greatly appreciated and admired.

    • Stacy Johnson

      In the event of a default, Roxana, the real estate market would undoubtedly suffer as well. As to the degree, in all honesty, I don’t think anyone knows. But as I said in the article, I don’t think the worst-case scenario will occur.

      • Roxana

        Thank you!

  • Stacy Johnson

    If you follow the traditional definition of a recession – a contracting economy – we’ve been out of the recession for 4 years now. We haven’t had negative GDP growth, if memory serves, since 2009.

  • Ha_l

    Most people have their healthcare through their employer, Medicare, or Medicaid. Obamacare is for the rest. Currently, they suffer through minor annoyances until something happens. Then financial devastation and the Taxpayer pays. I totally blame the Republicans. Why are they dead set against giving it a try for the estimated 7 million expected to sign up? Answer: because they’re afraid people will like it and it’ll expand. For me, it makes voting simple now, no more thinking. Next time, I just look for for the Democrat row and pull all the levers.

    • Mike907826

      Ha_l: While your comment makes sense on a macro level, you fail to see the true issue with the ACA. You are correct that today the taxpayer pays for the uninsured through medical facility write offs and higher insurance premiums. Where I am concerned about the ACA is that while more people will be insured and the write offs will greatly decrease, I do not foresee prices coming down. Today you pay $12 or $20 for an aspirin at the hospital because only 1 in 5 actually pay for it, with ACA 4 in 5 will pay for it, but still at the higher price. Insurance companies are also free to jack up the rates to compensate for the new rules, so we taxpayers get stuck subsidizing a big chunk of healthcare for the uninsured, plus keep paying higher prices since nothing was done to address pricing and our insurance rates continue to skyrocket because of the new load of supposed higher risk patients on the books. With that said, I suspect that the number of young, healthy people will really offset the number of sick people who come onto the system, but without special regulations on pricing and rates, the insurance companies and facilities can gouge us. In addition, ACA is not much different than today in that anyone could really go get basic crappy insurance like the lower tier ACA plans for about the same price, they just chose not too. It frustrates me to see us adding entitlements to the lower income tiers as you can go to any bank in the rougher areas on the first of the month and see fancy cars pulling up and people with the latest Iphones and trendy clothes pulling in to cash their welfare checks. If you can afford booze, cigarettes, iphones, Nike Airs and an Escalade, are you really that poor? I think we would have been better off to mandate insurance for all without subsidies, but let the government or perhaps organizations like credit unions (create insurance unions?) sell discounted or non-profit policies. That would foster competition and drive rates down, instead of up. It just seems that letting the government get too involved just adds bureaucracy and costs to an already over priced system. Look at Canada, the government insurance negotiated pricing with the drug companies and pays a fraction of what we do, it is illegal for Medicare/Medicaid here to do so as the lobbyists made it that way. I’d like to see it broken down into line items so we know what we are paying for, the ACA and many other laws in this country are so convoluted and full of pork, we are getting screwed big time. The Democrats are no better than the Republicans, they both sacrifice our future for political gain and we encourage them to do so as we want to get our share. So I would ask you to think hard before you pull the levers one way, take the time to research candidates and find the ones who will hopefully do the right thing. They are rare but may be on a different side than you think!

      • Ha_l

        Hey Mike, you’re all over the place. But it’s good to see someone with passion for the issues. I feel it. Still, it’s hard to comment on all that. But here’s some thoughts.

        First, the poor: I couldn’t care less. I wouldn’t want to be them and I believe most of them don’t want to be where they are either. Especially true today, when there 4 or 5 people looking, for every job opening. On the other hand, I do care about “Corporate Welfare”. Handouts to the rich and powerful. Wasteful spending everywhere to support some special interest, much of it disguised, like the $1.5B aid to Egypt which is actually nothing more than business handouts tor General Dynamics, et al.

        Drug cost: The problem here is two fold. The patent system, it’s horrendous. I think it’s 18 years, then they keep getting extensions. Lipitor is a perfect example. It was probably $5/day, now it’s finally generic and my local supermarket pharmacy offers it free. Honestly, I don’t know the solution. Maybe the Gov’t could buyout the parents, ie. cover the R&D so they can’t milk it for years and years. The Patent system is a total failure. Every other drug manufacturer did minor tweaks to get their own patent to rake us over the coals. At one point there was probably a dozen “statins”, all with market monopolies. I should also mention, only the U.S. and New Zealand allow advertising of Prescription drugs. Full page ads everywhere. How much did “Ask you Doctor about the Little Purple Pill” cost us.

        OK, now basic Health Care and the ACA: Personally, I favor single-payer, universal health care. The U.S. is the only country on the planet with for-profit health care. We pay twice as much per capita of the next in-line and we get poorer results. It’s not even a contest. No one thinks the Gov’ts can do anything right but I can’t believe our Gov’t can be so bad that we can’t do at least as well as the worst country providing health care for it’s citizens. Matching the worst country would mean a 50% savings. Our problem is the “for-profit” system. The ACA limits it a little, insurers will have to spend at least 80% of revenues on medical services, ie. 80% skim. Some were less than 50%.

        I like “Medicare-for-all”. When Medicare started it was administered by Blue Cross/Blue Shield (Part A/Part B). It worked great, efficient and simple. Unfortunately, even that system has degraded now with many for-profit middleman getting in the way, unlimited plan variations, gap insurance, advantage plans, and medical savings accounts. Go figure, 85-year-old’s are suppose to figure this out. If it wasn’t such a sad rip-off, it would be funny..

        Hopefully, ACA is just a start. Understand that the taxpayer already covers the most expensive – Medicare (that’s probably the time when most people have 80-90% of their lifetime medical cost), Medicaid (the poor who get basic service at best and have no alternative), Govt workers, Military, and Civil service workers, not to mention Congress with their medical facilities in the basement. What’s left? Unfortunately, we left the gravy on the table. The 20, 30, and 40 somethings that have few or no medical needs. Should they have an accident or be stricken with a dreaded disease, they’ll ultimately fall into the Medicaid group. They may financially wiping out their families first. It’s a sad commentary on the American system. The Taxpayer covers the catastrophic and we’ve given private industry the profitable piece. I say take back the “gravy”. Follow the Constitution and, – provide for the General Welfare.

        Last, Politics: I don’t understand why the Right Wing doesn’t support single payer Gov’t provided health care. Think about it. The U.S. is the only one to rely on employers for health care. It’s built into the cost of our exports. You mentioned Canada, I think their health care is the GST. If we didn’t require business to pay for our health care, our exports may be more competitive.

  • Rene

    I agree with many of the comments which I have read here today and whilst I appreciate the gravity of the situation in economic terms, there is an even more dire consequence of a debt default generated global recession – human lives!
    It may not be apparent to many, but particularly in third world countries or emerging economies, many lives are precariouly balanced around the ability to feed families and obtain adequate health care, all of which will be impacted in some manner by a worsening global economic climate.

  • yodaboy

    Stacy,

    Question on the debt ceiling: I know the repercussions if the debt ceiling
    is not raised and all, but why if deficits are falling so fast, as Democrats
    are saying, is it necessary for the US to raise the debt ceiling? Where are all
    the deficit savings going to if not to pay down the national debt, thus
    providing the option to lower the debt ceiling? It amazes me the amount of
    double talk, and I have yet to get an answer that makes any sense. The Obama
    budget, which personally as a person that had several accounting classes in
    college, does not meet the ‘standard’ of a budget, the White House budget does
    not show any ‘deficit reduction’, rather a decrease in the level of deficit
    spending. To decrease the deficit, ie in a personal scenario, I or anyone else
    would need to 1) spend less on credit then we pay, and 2) take out no more
    credit. Why would the administration say we are lowering the credit card bill,
    while saying we need another loan to make it work….

    Appreciate your take and thoughts on this.

    • Stacy Johnson

      No offense, yodaboy, but these conversations would be lot more useful if people would talk to one another without political implications. Despite what cable news would have you believe, many of the things we’re talking about here have nothing to do with politics or parties. Example: what you said above: “Why if deficits are falling so fast, as Democrats are saying, is it necessary for the US to raise the debt ceiling?”

      Our federal deficit isn’t a political opinion being promoted by democrats. It’s a fact. A number.
      This year’s deficit is expected to be about $700 billion. That’s down from over a trillion dollars last year, but it still means this fiscal year Uncle Sam will spend $700 billion dollars more than he takes in. While that’s obviously better than a trillion, it still means $700 billion will have to be borrowed to pay for that $700 billion dollars of spending.
      Now, one could argue we shouldn’t be spending $700 billion we don’t have. It’s a good argument, and one many on both sides of the aisle are making, especially Republicans. It is, however, a different argument than raising the debt ceiling, which is about paying for things we’ve already bought.
      But let’s focus on the issue you’re raising: to lower our debt, we shouldn’t be spending $700 billion we don’t have. You’re right, and I doubt anyone of any political persuasion would disagree. But to fix it in one fell swoop, one of two things would have to happen: taxes would have to be raised a ton, or spending would have to be cut a ton. Nobody wants to pay higher taxes. And while people talk about reducing spending in theory, there’s no way to reduce spending that much. Would you agree to slicing $700 billion if it meant people not getting Social Security? How about Medicare? Or what about defense? We could cut our defense budget to zero and still not save that much: it’s about $500 billion.
      What I’m saying is that, as a country and through our elected representatives, you, me and everyone reading this has allowed our country to develop institutions, entitlements and priorities that virtually guarantee that, except in the best of times, we’ll spend more than we take in. And the reason spending isn’t being cut to sustainable levels or taxes are being raised enough to pay for it is because of us: We won’t allow it.
      This has nothing to do with right or left. It’s just what is. And we’ll find solutions a lot sooner – and like each other a lot more – if we leave the rhetoric out of it and instead just discuss it like people sharing a similar problem. Because that’s exactly what we are.

  • Cheryl

    Congress? No.. RWNJs and the TEA PARTY – get your facts straight or get out of the business of reporting. Our country is being destroyed by the likes of Ted Cruz, Cantor, Boehner, etc…this article is misleading and WRONG.

    • bsetrader

      Why don’t you call your bank or mortgage company and tell them to increase your line or debt limit because you cannot service your existing debt without doing so? Its completely and utterly mindless how people believe government operates under no rules at all, as a matter of fact, antithetical rules of finance. The greater the government debt burden, the better, more stable, and more solvent.

  • Jeffrey Dorfman

    Why don’t you run for office? You ‘re not doing anything now and it seems you may have something to offer.

  • Tom

    anybody who is in the tea party, or any Repug whose silenced enabled them, should be removed from office asap.

    • bsetrader

      Blah, blah, blah…lap it up, sheep!
      Ignorance IS NOT bliss and everything you believe is nonsense!

  • bsetrader

    How can an ignoramus like this be given a column? What he states as fact is completely untrue. Any entity that has to borrow more money to make existing debt payments, interest or principle, or both is insolvent. Its axiomatic that if you are not taking in enough revenue or taxes to service existing obligations, you are insolvent. If this author bothered to dislodge his cranium from his rectum and do just a little bit of research, he would discover that interest payments are only 6.3% of revenues($32 Billion) and the US government collects over $225 Billion every month. I stopped reading after the 2nd paragraph because this guy is a lemming who doesn’t check facts and too lazy to visit BEA, FRED, and BLS.

  • MikeS

    People need to have an open mind and be willing to discuss the issues without all the calling of names and the spouting of hate. To many of us are so caught up in the blame game that we forget how to discuss the issues with any intelligence. There are some valid points made here on some very important issues that effect us all. I do believe congress needs to do the same. We cannot have one party add an amendment to a spending bill and if they don’t get their way, close down the government and hold us all hostage until they get their way. We cannot allow this to happen. They just need to take politics out of this and just do what we elected them to do.

  • Lindy Stretch

    Bipartisan spending cuts? How in this reality here in the US could that ever happen with the House full of,self absorbed people who gerrymandered their way in and will do ANYTHING to get reelected. It’s hopeless, it’s broken irreparably. We’ll have to wait til 2016 to see if we can reconfigure the house to get anything at all done. Till then the lights may be out.