The US Debt Ceiling

Dear Reader There is an ongoing crisis within the US’, where the federal government has overspent, again, leaving the US at risk of defaulting on their debt. The implications of a US debt default would be catastrophic, not only for investors, but for a lot of the citizens of the USA and the rest of the world, including the UK. US lawmakers have until June the 5th to come to an agreement on the issue, this will likely lead to the debt ceiling rising, which will also create problems, albeit a far lower impact. I’ll explain what this all means for investors specifically. To begin, it’s sensible to look at the main concern, which is the prospect of a debt default. I’ll first explain the issues that the markets would face. A US debt default would likely create significant market volatility, causing uncertainty and hesitation among investors. The prospect of default can lead to increased risk aversion, prompting investors to reduce their exposure to equities and seek safer assets – this is especially the case with rising interest rates, cash ISAs are starting to provide up to 7% interest on your savings which allows for great returns on a zero-risk investment. This flight to safety can put downward pressure on stock prices and increase overall market volatility, we’re already starting to see this happening with major traditionally stable and successful companies like Target, AT&T and Bank Of America all crumbling under the pressures of the current climate, and they’re only a few notable ones! This situation is making it challenging to predict market movements and potentially affecting investment decisions. The impact of a debt default can extend to credit markets, including corporate bonds and other fixed-income securities. Investor confidence in the reliability of US government to pay off their debt may decline, leading to higher borrowing costs for companies and potential credit rating downgrades. The availability and cost of credit can significantly impact businesses, influencing their investment decisions and financial health. Investors in corporate bonds or those with exposure to fixed-income markets may face increased volatility and risk associated with potential credit market disruptions – investors could lose their interest payments or part/all of their money if the US government were to default on their debt payments. A US debt default can lead to currency fluctuations, particularly involving the US dollar. Investors may seek safe-haven currencies, such as the British pound, if they perceive the US dollar as less stable due to the default risk – this may be beneficial to UK investors, but as UK companies and investment firms in the UK have major investments in the US, it’s likely that the UK market will too see a downfall, despite a potential increase in the value of the British Pound. Fluctuating exchange rates can introduce additional uncertainties and risks for investors, necessitating a careful assessment of currency exposure and potential hedging strategies. In the case that the debt ceiling is, again, risen, would allow the US government to continue borrowing money to finance its operations and meet its financial obligations. Without an increase, the government may be forced to make difficult decisions, such as cutting spending or delaying payments. By raising the debt ceiling, the government can maintain its spending levels and avoid disruptions to essential services, such as healthcare, defence, and infrastructure projects. However, it also raises concerns about the long-term sustainability of government debt and the need for fiscal responsibility – which may leave markets in a volatile state. While raising the debt ceiling provides immediate relief, it also raises concerns about the long-term fiscal health of the US government. Continually raising the debt ceiling without addressing underlying fiscal issues can lead to a growing national debt and increased interest payments. It highlights the importance of addressing spending, revenue, and budgetary reforms to ensure long-term fiscal sustainability. Failure to address these concerns can have consequences for future generations, including higher taxes, reduced government services, and potential economic instability. Overall, the situation is very worrying and it’s important to be attentive when there are major issues like the debt crisis, it’s best to wait to see what happens rather than shooting too early or too late and potentially lose money. Be sure to keep an eye on markets and the news! Please note that the information provided in this blog is for informational/entertainment purposes only and is not intended as investment advice. It is important to conduct your own research and seek the advice of a financial professional before making any investment decisions. Thanks for reading, that’s all for today! I’ve been rather busy for the last month or so, many apologies for not posting another blog sooner. I’ll likely post another one in a week or so, I’ll talk about pensions in the UK and what the new budget and new tax year means for pensions. Ben J Kester Managing Director of Ben J Kester Investments Limited  13927045  Please note that the information provided in this blog post is for general informational purposes only and is not intended as financial, legal or investment advice. The information in this blog post should not be relied upon as the sole basis for making any investment decisions. The opinions and views expressed in this blog post are those of the author at the time of writing and are subject to change at any time without notice. It is important to seek independent financial, legal or investment advice before making any investment decisions. Investing in the stock market carries risk, and you may lose all or a part of your investment. The author and any third-party providers of information do not guarantee the accuracy, completeness, timeliness or availability of the information contained in this blog post and shall not be liable for any losses or damages of any kind arising from the use of this blog post, including but not limited to, direct, indirect, incidental, consequential or punitive damages. This blog post is not intended to be a promotion or solicitation of any investment products or services and should not be relied upon as such. It is important to be aware of the laws and regulations related to investments in your country or jurisdiction and ensure that you comply with them. In the United Kingdom, the Financial Conduct Authority (FCA) regulates the financial markets and provides information on investments, frauds and scams. Investors are advised to visit the FCA website or seek professional advice before making any investment decisions.