The Debt Ceiling

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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9 Comments

 
  1. The last line is amazing :)

    People wonder why I change the subject when they talk about the government. The last line above is exactly why.

  2. I’m surprised you wrote about this Ramit but I’m glad you did. As a canadian, im so sick of hearing about this debt ceiling. There is absolutely no way that the US Gov’t is going to go into default. This is all just a political game. The debt ceiling has been raised 36 times in the past 36 years, every time a simple bill was issued and passed and it didnt even make media news. Now out of nowhere, it’s the end all, be all of news right now.
    People panicking about the debt ceiling is the reason who almost all retail investors suck at investing their own money. They are too emotional. But as a long time investor, it just seems like a good time to dump more money into my porfolio and look for some good gains in the coming few years.

  3. The last sentence, however true, is entirely true for your personal finance system. However your personal finance system is dependent on the external monetary system.

    The ripples that CAN be felt are the macroeconimic effects of them fucking up. That means it probablby won’t make much difference in your account what they do. However, once you have accumulated 1 million dollars for retirement, the difference between what those guys have decided is wether you can buy a big house or just a Volvo with it since this is the effect their decisions WILL have on the currency itself. You can only escape this cycle by investing in materials, gold is one of them. However, as you said before, this might over the long term not save you from the fact that gold does not produce any revenue in itself.

    On the other hand your relying on statistics of the stock market may in fact make the tactics of broad index investment vulnerable for a black swan event that defies all previous statistics. Not, that I would do anything different, but knowing this vulnerability and not denying it is what I prefer.

    In fact, the decision of the debt ceiling will not have an effect on your bank account. What your bank account will buy, is a whole different story.

  4. It is completely true that the possibility of a default is remote, however let’s not forget the side effects of this brinkmanship including moody or s&p’s downgrade (greece is feeling those effects), a drop in confidence that the US dollar is a safe haven(not that people have anywhere else to go with the euro taking its own pounding), and the impact on our own sputtering economy this will have (cuts to govt employees and other investments, poor NASA).

    (sorry i like making side comments)

  5. default? that will never happen as long as they print their own freaking money to stimulate the economy, U.S dollar will never be safe until they mind their own businees and get out of everyones country that has oil and help their own populous

  6. I am shocked this post does not have more comments. Either your readers are indifferent, or this really struck a nerve.

    Personally, I don’t like to talk politics because I find it stressful. I will literally start to stress out about something that I have zero control over, which is irritating itself. So I avoid it completely. Like you said, it’s not going to directly affect my personal finances, so I should just move on.

  7. The USA is spending an eye watering $2.5bn a day (Yes a day) on fighting wars when the USA is not even under attack but they don’t seem to put that on the table when they talk about stopping peoples pensions who have paid for them all their live

    Click my name to see a full breakdown of this $2.5bn if you don’t believe it’s that height.

  8. Last line was pure zen. If only more people could see how true that statement really is.

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