The US Debt Ceiling and Your Investments

Proper budgeting is always a good idea. Be it a private individual or a government. The USA has imposed a debt ceiling on itself. Only up to this amount are they allowed to borrow money to meet their obligations. As soon as this limit is reached, the United States Congress must raise it or put on the spending brakes. Otherwise, the worst-case scenario is a default on the government’s obligations. 

Reason enough for the media to stir up fears and draw the attention of readers to spectacular headlines. The question of "what if" is indeed a tricky one. Because if Congress fails to raise the limit, there will be turmoil. In 1917, the debt ceiling was first introduced in America and has already been raised 78 times since 1960. On the one hand, this shows that we have seen this movie many times before, but it also shows that the concept of an absolute debt ceiling is questionable. 

Still safe

The debt ceiling will also be raised for the 79th time. That is our clear opinion. Until then, however, the entire ideological spectrum will seek to make political capital out of the situation. 

Government bonds issued by the United States of America continue to be the safest way to invest U.S. dollar holdings at fixed interest rates with the desired maturity. The U.S. issues bonds in U.S. dollars and thus in the currency it can “print” indefinitely. So why risk a systemic meltdown by not servicing this debt? 

The negotiations surrounding the debt ceiling may lead to increased fluctuations in bonds and equities. But we are confident that the U.S. will continue to service its debt. The 14th Amendment to the United States Constitution states, “The validity of the public debt of the United States, authorized by law, [...] shall not be questioned.” If, against expectations, a solution cannot be reached, the Supreme Court could draw a line under the recurring turmoil in a lawsuit. One almost wishes it would eventually come to that. But only almost as one should not play with fire.

In Gutmann Portfolio Management, we remain overweight in equities. This means that most mandates are 5%-age points above the respective selected strategic equity allocation. It is our task to guide our clients with a steady hand through potentially turbulent times. This is best achieved with a Gutmann portfolio of selected, high-quality bonds and equities.