This week’s theme on the Retirement Quick Tips Podcast is: Debt Ceiling 2023: What It Means For You

Because I record these episodes at least a week before they’re published, my hope is by the time you listen to this episode, the debt ceiling issue will be resolved with very little stress on the markets. That’s my hope, but let’s talk about 3 possible scenarios, since June 1st may come and go without a solution.

There was a great article in the WSJ published on 5/20 that outlines 3 main scenarios for the debt ceiling standoff. 

If you want to read the article in more detail, I’ll link to it in the show notes:

https://www.wsj.com/articles/debt-ceiling-standoff-could-start-a-recession-but-default-would-be-worse-d536c3f3?st=po79c6mhgrpzzcv&reflink=desktopwebshare_permalink 

3 main scenarios:

1. Last minute deal - best case scenario, they come to an agreement before June 1st. In this scenario, there should be little impact on financial markets, and perhaps a big jump in stocks this week if that happens and as markets breathe a sigh of relief

2. Deal after deadline - this is what I think is the most likely scenario. June 1st comes and goes and there hasn’t been a deal struck. Negotiations are contentious and power is divided, and this looks a lot like the debt ceiling debacle in 2011.if this happens, you’ll likely see a severe reaction from the stock market. 

 According to the WSJ: “If consumers’ retirement and investment accounts suddenly shrink, they could sharply curtail their spending, the lifeblood of the U.S. economy. Businesses could pause hiring and investment plans.”

Debt payments would have to be prioritized and you’ll likely hear stories about veterans not getting their benefit checks on time or federal employees being furloughed. The government would have to prioritize their payments and would need to decide where to keep the lights on and where to stop paying the bills. 

1. No deal - Absolute worst case scenario. “There would be chaos in the global financial system” says Wendy Edelberg, an economist at the Brookings Institution. 

According to the WSJ: Missed payments would disrupt multitrillion-dollar global flows in short-term dollar borrowing, which are critical to how banks and companies fund operations.

Investment funds, companies and banks all hold Treasurys. Their falling value would hammer balance sheets. Recent bank runs were sparked by falling values of Treasury debt, and the declines could be much steeper in a default.

Analysts also say many investors would flee from risky assets of all sorts. The stock market would plummet 45% in the following months, and unemployment would shoot up by 5 percentage points, a White House report said. UBS said a month-long impasse would cause the economy to contract for four-straight quarters.”

No deal is also political suicide for all involved, so while I don’t think those in power at the top are especially competent, they do like being in power, so they’ll at least be motivated to come to an agreement as the pressure mounts. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.   

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