The Community Voice — What does debt ceiling debate mean for you

The Community Voice - What does debt ceiling debate mean for you

If youre like most Americans, the term debt ceiling probably didnt mean much to you until recently. Now, of course, the debt ceiling debate is front-page news, day after day. As a citizen, youre no doubt hoping the situation is resolved in the best interests of the country. But as an investor, you may be especially concerned about what might happen to your holdings and your overall investment strategy if the debt ceiling is not increased by the Aug. 2 deadline.

Before you consider how the situation may affect you, lets quickly review just what is meant by the term debt ceiling and what might happen if no agreement is reached. Essentially, the debt ceiling is the legal limit on borrowing by the federal government.

If Congress doesnt increase the limit, borrowed funds wouldnt be available to pay bills, so the U.S. could be forced to default on its debt obligations, which would be unprecedented.

No one can really predict what might happen if the debt ceiling isnt raised, but virtually everyone agrees it would be an undesirable outcome. Thats why Congress has, more or less routinely, always raised the debt ceiling in the past in fact, its been raised every year for the past 10 years. This year however, political and philosophical differences between Congressional leaders and the current Administration have, thus far, blocked the lifting of the debt ceiling.

Nonetheless, theres still time for Congress to take action before Aug. 2, which is the estimated date when temporary actions to avoid default are exhausted. (The actual debt ceiling was reached in mid-May.) As an individual investor, heres what you can do:

Dont panic.

Its hard to imagine an agreement wont be reached to raise the debt ceiling, even if such a deal doesnt happen until the last minute. But even if the Aug. 2 deadline passes, the U.S. may still find ways to make payments on its debt for a while. So dont rush into investment decisions based on this scenario.

Overlook short-term results.

Even if the U.S. finds ways to pay its debts after the deadline, lenders who dont like uncertainty could become more concerned and start demanding higher interest rates on their investments in U.S. Treasury securities.

As a result, market interest rates could rise across the board, leading to declines in bond and stock prices. Remember, the market can drop for any reason, and this would be no exception. While such a drop could well be sharp, the resulting distress would likely jolt Congress into taking quick action on the debt ceiling.

Dont let debts and deficits drive your investment decisions. Even after the debt ceiling issue is resolved, concerns will still exist about the countrys debt and deficit issues. As an investor, you should make investment decisions based on your individual goals, risk tolerance and time horizon rather than the level of debt being incurred by the government.

The debt ceiling story can certainly be unsettling but it doesnt mean you should let the roof fall in on your investment strategy.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Ken Weise is a financial advisor at Edward Jones Investments in Rohnert Park. He has been helping individual investors and small businesses reach financial goals for over 10 years. He can be reached at 584-4146.

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