The Debt Ceiling
July 25th, 2011 - 9 Comments
I’m just back from vacation, and my brother reminded me of a line I used to use in one of my talks.
I’d joke how the only way your government bonds would become worthless is if the government defaults…”and the government doesn’t default, it just prints more money.”
Always good for a laugh. Yet the situation in Washington is becoming increasingly crazy as talk of a government default becomes very real.
Here’s my take:
First, I rarely make predictions as experts know very little. So when people hear I write about personal finance, and their first question is “Any stock tips?” I just stare at them.
Now, despite the thousands of things I hate, I’m an optimist. For a situation like the debt ceiling, all parties involved have incentives to resolve the situation. When everyone agrees that something must be done, it almost always gets done.
But there’s something even more important.
When I hear about people freaking out at macro-economic events like this, it’s not a rational, measured response to serious research. It’s fear of “OMG! The sky is falling! I better do something….maybe I should liquidate my stocks!! Or call my broker!! Or….something!!!”
In the unlikely scenario that the debt ceiling isn’t increased and the doomsday ramifications come through, then we will all have larger problems.
Indeed, the very people who make these rash decisions often make similarly rash decisions as soon as the market turns a corner. From a fascinating Wall Street Journal article, Jason Zweig notes that: “…It looks as though many of the retail investors now getting back into stocks are the same people who bailed from the market just before the start of a historic bull run.”
These same people will curse the President, tax rates, Big Banks, and everyone else possible for their own poor choices, never stopping to spend one weekend reading a good personal-finance book.
Better to think long term.
Yes, it’s possible the government could default, or the stock market could tank overnight…but it’s more likely that very little will happen in the short term. So would you rather focus on the 0.05% chance…or the 99% chance?
Note that I said “focus,” not prepare for. As I write about in my book, you always want to diversify your investments so that if the worst happens, you’re prepared.
But the biggest risk is inaction, not some catastrophic macro-event.
Long-term thinking prevents this.
This is why sensible Indian people always buy 4-door cars: because they know that if you keep your car for 10+ years, you will have kids by that time. Optimize for the long term.
It’s why some people stay married for decades.
And it’s why, when you automate your finances, you’ll be preparing for the long-term…automatically.
Keep this in mind when you hear the raging rhetoric of journalists and pundits. Remember that personal finance is very different than macroeconomics. In fact, in almost every situation, your financial situation has very little to do with what Washington politicians decide.
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