I have received several requests to write an article on the U.S. debt situation — something that has been getting a lot of attention in the news recently with an important deadline approaching.
August 2 is the day when apparently the U.S. government will run out of money, as they will be unable to borrow any more to finance their deficit spending.
What does this mean?
Among other things it means that they will have no choice but to default on their debt.
A number of readers have asked me to comment on the implications of such a default, and here is what I would foresee:
A financial crisis of epic proportions.
And that is about all I want to say about it, because it won’t happen.
To avoid a crisis on August 2, the U.S. Congress simply needs to authorize an increase to the debt ceiling — something they have done 72 times since 1962 and 10 times in the last decade alone.
The problem is that more and more politicians are refusing to support this increase unless a credible plan to get the debt situation under control can be agreed upon first.
I have no interest in taking sides politically, as both parties can share in the blame for getting them to where they are today. But suffice it to say that there are differences of opinion as to how and when the debt issue should be tackled, and what is best for the U.S. economy.
But rest assured that sometime soon they will reach an agreement. They have to, and it will probably happen at the 11th hour.
Worst case scenario is that it does not happen by the deadline, in which case the markets would fall the next day which would put tremendous pressure on them to get their acts together and reach an agreement — and they would, then the markets would likely recover.
But that of course is not the real issue.
What is more important has to do with the agreement that they reach, and whether or not it solves anything, as opposed to kicking the can further down the road. Because while a default is very unlikely, there is a real possibility that U.S. debt could be downgraded. And while not as catastrophic as a default, the implications would still be serious. One would think this would mean higher interest rates, for example, but even that is not a given in these days of Quantitative Easing.
What is an investor to do?
In my opinion the same thing I have been preaching for years.
Count on more money printing and make sure you have some exposure to gold and other precious metals.
Engage the services of a global bond manager who understands the macroeconomic situation and manages your money accordingly.
Have some exposure to responsibly managed hedge funds.
If you are to buy stocks, focus on ones that pay dividends that you can reinvest as you see fit.
Look at alternatives such as annuities, which provide income that is certain and secure. And don’t overlook things that you can control — such as reducing taxes on investment income.
But most of all: focus on what you need your money to do for you, and plan accordingly.
If you need help, please call.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund.
For more information feel free to call Jim at 250-594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.