4 Things Investors Need To Know About The Debt Ceiling Crisis

4 Things Investors Need To Know About The Debt Ceiling Crisis

Posted On September 29, 2021 11:06 am

With the market 28% historically overvalued, investors have been increasingly nervous about a major market sell-off, like we saw in December 2018 or March 2020.

Corrections are perfectly normal, healthy, and to be celebrated, not feared.

(Source: Jill Mislinksi)

Anything can cause a correction, which historically happens every year to 18 months.

Today there are nine risk factors that could trigger the next correction but by far the most significant is the escalating debt ceiling crisis.

Goldman Sachs economists wrote in a note last week that the current standoff is “the riskiest debt-limit deadline in a decade.” – Reuters

So let’s take a look at the four most important facts about the debt ceiling, and why it might cause a sharp December 2018 style correction in the coming two to four weeks, how you can protect yourself, and even profit from the next scary market slide.

Fact 1: What Is The Debt Ceiling

The debt ceiling was created by Congress in 1917 to help fight WWI. Before then Congress had to authorize all borrowing from the US treasury and this created an unmanageable amount of paperwork as the nation matured and the government’s role in our economy became more complex.

Initially, the debt ceiling was set at an arbitrary $1 billion, which was more than twice the spending in 1916.

Since 1960 the debt ceiling has been raised or suspended 78 times, basically once per year, including seven times since 2013.

It’s important to know that the debt ceiling does NOT authorize new spending, but merely authorizes the US treasury to sell bonds to pay for things Congress has already voted for.

For example, in the last four years, nearly $8 trillion in spending was approved by Congress, almost all of it pandemic relief. The spending has been done, and now it’s time to actually pay the bills, and that’s what the debt ceiling allows.

Fact 2: Why Congress Might Not Act In Time

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Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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