May 24, 2023 / 8:03 AM / MoneyWatch
U.S. debt default would spark job losses
U.S. debt default would spark job losses across the country 04:59
With only days left to avoid a historic default on the nation’s debt, Americans are getting nervous about the potential impact on their money, from their investments to whether they’ll get their Social Security checks on time.
To be sure, many political and financial analysts still expect President Joe Biden and House Speaker Kevin McCarthy to reach an eleventh-hour deal to lift the government’s debt ceiling before the U.S. runs out of money and is unable to pay its debts.
But experts say the risk of a default is rising as the nation approaches the “X-date,” or the day that the U.S. will be tapped out of funds to pay the nation’s obligations, which Treasury Secretary Janet Yellen has said could arrive as soon as June 1. The impact could slam the economy, roiling the stock market and disrupting payments to Social Security beneficiaries, federal employees, and programs like Medicare and Medicaid.
“A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on U.S. and global financial markets,” said Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution.
To prepare for such a scenario, here’s what experts say about financial moves to consider.
Should you move money out of investments?
A U.S. debt default would shake global financial markets, spurring many investors to sell stocks and bonds. It’s uncertain how much stocks could tumble, but when the nation came close to crossing that line in 2011 the market plunged 17%.
In case of a default, “There is a great chance that there is meaningful disruption to the U.S. financial markets,” noted Tony Roth, chief investment officer at Wilmington Trust, who said more clients are asking about how they can protect their assets in such a situation.
Selling some investments and moving those assets into cash could be one way to protect yourself against a market plunge. But Roth and others note that such a strategy is essentially trying to “time the market,” or predicting when stocks will rise and fall — a notoriously difficult tactic.
While an investor could sell stocks ahead of the projected default day in early June, it would be difficult to know when to get back into the market, Roth noted. If you get that timing wrong, you could miss out on subsequent trading days when the market recovers.
“How do you get back in, that’s the hardest question,” he said. Roth’s firm isn’t advising clients to sell and move into cash or other safe havens; but, he added, it also “wouldn’t be a crazy thing to be considering right now.”
What about putting money in cash, gold or bitcoin?
If you want to shift into cash, the safest option may be to sock away the money in a high-interest savings account at an FDIC-insured bank that pays a rate of more than 4% or in certificates of deposit, experts say.
Some investors are turning to gold as a safe haven as the U.S. gets closer to hitting the debt ceiling because the metal is a long-time hedge against instability, according to Bloomberg, citing an investor poll from early May. Some are also considering bitcoin, but to a lesser extent than gold, the publication noted.
Historically, gold hasn’t offered the same type of returns as stocks, and bitcoin can be volatile, so it’s best to be prudent, experts said.
“Consider making slow changes to your asset allocation in terms adding some alternative asset classes, like gold and bitcoin,” noted Ken Tumin, banking expert at DepositAccounts.com. “Generally stocks and bond have been tried and true over many, many decades.”
Should you just sit tight?
That’s a completely legitimate strategy, especially given that most experts say they believe the White House and Republican leaders will resolve the situation before the debt ceiling is breached.
And, as noted above, timing the market is known to be difficult, if not impossible, which means that pursuing such a strategy has its own risks.
What about an emergency fund?
Having some emergency savings on hand is especially important for people who rely on federal payments for income, such as Social Security recipients or federal employees, because those checks could get disrupted in case of a default.
However, trying to build an emergency fund within days may not be feasible for many people, especially those who are on fixed incomes or don’t have wiggle room in their budgets.
“If you’re in the military and your pay isn’t going to come, make sure you have a little extra cash to make your rent payment or mortgage,” said Jacob Channel, senior economist at LendingTree. “Try to shore up a little extra cash, although that is usually a lot easier said than done.”
With reporting by the Associated Press.
- Debt Ceiling
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