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welcome to the best interest podcast where we believe Benjamin Franklin's advice that an investment in knowledge
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pays the best interest both in finances and in your life every episode teaches you personal finance and investing in
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simple terms now here's your host Jesse Kramer hello everybody and welcome to
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episode 57 of the best interest podcast my name is Jesse Kramer today we're going to be talking all about the debt
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ceiling crisis that almost happened that big debacle things got a little bit tense leading into Memorial Day weekend
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and thankfully our politicians pulled through they figured out what they're going to do kind of sort of at the very
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least they kicked the can down the road but we're going to go into detail today
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because probably what you guys saw on the Nightly News or even if you read a quick blurb in the newspaper it didn't
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really dive into detail about why these things happen why they've been happen
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happening now for many many decades why some debt sealing crises really have caused the government to temporarily
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shut down and considering we only kicked the can down the road what might happen
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in the future so we're going to dive into some details there explain what happened but where we're going to start
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is actually more important because where we're going to start is what you guys
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should be doing about this fact that we just had a debt sealing crisis what if anything you should be doing should you
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be taking any action in your personal financial lives should you do anything to prepare for the eventuality of a
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future debt crisis all good questions so we're going to start with that we're
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going to start with the cool actionable advice the stuff that you guys can take away from today and then we'll dive into
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detail on exactly what this debt sealing issue was and you're going to walk away
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a little bit smarter and with some takeaways to implement into your own life all right let's kick it
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off [Music] okay so what should you do about this debt sealing crisis what lessons should
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you learn and what what can you implement into your personal finance life the short answer and you'll have to
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follow me here the short answer is nothing that you weren't already doing assuming though that you have good
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financial habits in other words if you already had all your financial ducks in a row then you're fine you're
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totally fine you don't need to change a thing this debt sealing crisis isn't
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really affecting you it didn't affect you at least not in the long run okay however if you don't have your financial
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ducks in a row then there are some changes that you should make you probably should have been making these
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changes regardless of a debt sealing crisis existing in the first place and perhaps this debt sealing issue is a
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reason reason for you to change sooner than later so again if you had your personal finances in order there's
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nothing you need to change if you didn't have them in order well you would have
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needed to change your personal finances regardless of a debt cealing crisis but the debt ceiling might be that straw
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that breaks the camels back so let's go to an example let's say you are a
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federal worker and you were essentially one Congressional vote away from temporarily losing your paycheck because
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that's what would have happened here right the whole debt cealing crisis it has to do and we'll dive into this in a
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second but it has to do with the idea of does the federal government allow itself
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to go further into debt and if it doesn't allow itself to go further into debt then they kind of stop all
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operations until they figure out if they're going to go further into debt and stopping all operations means well
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some people aren't going to get paid so if you're one of those people that
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wasn't going to get paid let's say that you don't really have much of an
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emergency fund you were staring down the barrel right you were on the verge of being in trouble you would have no
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paycheck coming in you'd have no emergency fund to cover next month's expenses what exactly were you going to
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do so there's a very good reason there to build up your emergency fund we've
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talked about it before here on the best interest podcast written about it on the
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best interest blog how much of an emergency fund do you need it depends different people will tell you different
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things my range of advice is 3 to 12 months of living expenses and usually the shorter end of that
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range is for someone who doesn't mind a little bit of risk in their lives but
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also someone who feels very secure in their job security if if there's not much risk of you getting fired or if you
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were to say lose your job if you believe that you're quickly rehirable well then you can afford to
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have a smaller emergency fund but with someone who either is a little less secure in their job or has a very say
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unique job that it might take them a long time to get rehired they might want to be closer to that 12-month emergency
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fund I'm working with people in my day job who let's say you're a high level
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executive you were brought in to run this company and that's really what you
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want to do with your life you want to be in charge and there's only so many positions like that out there right a
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limited number of positions if for some unfortunate reason you were to lose your
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job you might not want to just jump at the first opportunity that comes your way you want to take your time you want
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to see what opportunities are out there you want to evaluate the pros and cons of everything you're going to need time
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to do that you're going to need time to travel for interviews to to evaluate
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different positions All That Jazz you get what I'm saying that might not be something you can do in three months you
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might need six or 9 or 12 months maybe even longer and if you find yourself in that position you're going to want an
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emergency fund that that matches that need in your life so yes this death sealing crisis for some people might
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have highlighted their need for for an emergency fund similarly like we can think about the investing side of the
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world the debt ceiling it certainly shook up the bond World a little bit and whenever anything gets shaken up in the
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bond World it ripples its way into the stock market we could dive into details there long story short because the
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treasury is involved here and the treasury they're the ones who issue treasury bills and notes and bonds and
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when you hold a treasury bill note or Bond you expect to get repaid makes sense right well if the
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treasury is no longer really paying back its debts because there's something
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going on with the debt ceiling it's going to affect at least in the short term the value of Treasury in this case
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treasury bills treasury bills are the shortest ones okay so the value of treasury bills we saw in the treasury
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markets in late May and early June we saw Bill prices Rippling changing pretty quickly yeah that infiltrated its way
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into the stock market a little bit there was some volatility definitely some uncertainty now if that uncertainty over
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that two-e time span drove you up the wall that might be a sign that your investment allocation isn't quite right
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or similarly if that volatility over that two-e time span if it materially damaged your wealth in some irreversible
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long-term way that might be a sign that your portfolio wasn't constructed correctly but again that isn't unique to
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the debt sealing crisis my my point is whether there was a debt sealing crisis or not the fact that your portfolio
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suffered damage in such a short period of time IR reversible damage or the fact that you were stressed out in such a
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short period of time over something that happened in your portfolio that is a sign that your portfolio probably wasn't
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in the right spot in the first place because debt ceiling crises they happen natural disasters happen
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political turmoil happens sometimes there are Wars in foreign countries that happen like this Ukraine Russia war that
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we saw really rocked the investing World in early 2022 of course it's a terrible
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humanitarian thing but these things happen life happens the world has some chaos in it it always has and it always
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will and if that chaos sometimes it's short-term sometime it even stretches out to years but if that chaos affects
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the market in some way and therefore affects your portfolio creates some volatility and ends up making your
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stomach upset that you lose sleep at night because of the chaos in the world and the volatility in your portfolio
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that might be a sign that your portfolio is a little too volatile it's a little
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too risk- heavy and maybe you need to be in something else that cealing crises happen this one might have been the one
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that showed you that your portfolio isn't quite in the right place the thing
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that I want you guys to take away from today is that your portfolio wasn't in
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the right place regardless of the debt cealing crisis Happ happening for most people if your emergency fund was in
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place if you had a balanced portfolio based on your personal timelines and goals and based on your personal risk
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tolerance then this debt cealing crisis really had no effect on you at all and there's nothing that you need to
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[Music] [Applause] [Music] change all right let's dive into to exactly what happened with the debt
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sealing crisis why it happened we're going to talk a little bit about government and politics a little bit of
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Economics it's not really so much personal finance but if you care about the way that your little corner of the
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personal finance and investing World fits in with a bigger picture this is going to be an awesome podcast for you
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that's one thing that I do care about I'm I'm really interested to know how my
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little budget and my little 401k and my little Roth IRA how do they fit into the
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greater economy how do they fit into the way that governments work because these
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things in the world they they do affect you it doesn't mean that you need to
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change what you're doing as we just went over but they do affect us so let's
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let's talk about it government is a bit like a business at least that's the way
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that I think about it now that business it aims to provide services and infrastructure that we all
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use this could go down a pretty interesting political science rabbit hole that I'm vastly unqualified to talk
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about but the idea is are there some things in this world that we should all pitch in on because we all or most of us
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end up using that that's essentially the essence of government or that's one of
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the ways that I think about it and you have some people on the political Spectrum who say no absolutely not
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everything should be independently owned and operated and run and if you want to
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use that thing you pay for it and if you don't want to use it you don't pay for
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it if you don't know what I'm talking about that tends to be maybe a more
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libertarian or or right-wing conservative view this idea of a smaller government a government that does less
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putting more responsibility on individual people to build their own things to maintain their own things to
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run their own things etc etc you know private schools instead of public schools but then on the other end of the
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spectrum on say the left or the liberal end of the spectrum are thoughts that yeah there are some things that
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everybody uses and so everybody should pitch in we should be taxed we're going
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to get to that and then we we all pay for it we all use it and government this this quote unquote independent body or
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this body that we vote in maybe there are some appointed positions they're the
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ones who run and maintain these shared resources so lots and lots of things in our government we have you know schools
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to educate us roads to transport ourselves and our Goods many of those things cost money and they combined for
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the roughly $6.5 trillion us annual federal budget that's what our budget was last year $6.5
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trillion with a t and that's roughly $220,000 per US citizen now any business
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because remember the government is a bit like a business their business is providing the services and providing
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this infrastructure to us businesses need to make money somehow they don't necessarily need to make profit but they
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need to intake revenue and governments of course they collect that Revenue via taxation that's payroll taxes sales
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taxes corporate taxes the taxes that we all pay you guys get it now government though it's kind of a unique business
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because well one we can't really opt out of being the government's customers
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unless we choose to move to a different city a different state a different country we can choose to exit the
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government that we're in but as long as we're here you're part of it we can
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partake in government though through voting or through running for office we can aim to change the laws for Revenue
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collection and spending if we want to that really is probably the biggest debate on a recurring basis in
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government how many taxes how much tax should we collect and then what should we spend it on that's one of the biggest
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roles of any elected official how much money is the government going to spend what are we spending it on and how will
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that affect John Q Public's tax bill so that brings us to today's topic the debt
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ceiling now the topic has been all over the news let's try to explain the whole
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debt sealing drama in simple terms now first I'm going to address four somewhat
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related questions what is the debt ceiling why does the debt ceiling exist why are we in debt in the first place
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and how does this debt continue to grow so the US government is in debt lots of debt we'll talk a little bit later about
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why that's not ideal but also we'll talk about why it's not as bad as if you were
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in debt in your household right now the US is approaching 32 trillion that's
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trillion with the T $ 32 trillion doll of debt and it's only going to go up at
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least for the near term it's only going to go up we're in debt because well at
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least for each of the last 22 years the federal government has spent more money on the schools on its roads and on lots
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and lots of other things it's spent more money than it has collected in taxes we
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operated in other words in an annual deficit the reason why I mentioned 22 years earlier is because there were some
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times in the late 2000s or sorry the late '90s early 2000s when the US government operated at an annual Sur
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plus it was still in debt but the debt was shrinking now for the last 22 years not only have we been in debt but the
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debt has been growing year over year over year we've been operating at an annual deficit and to make up the
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difference between the tax that were collecting and the money that we're spending the government has borrowed
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that money we've gone into debt the debt has now grown $32 trillion well there comes a question
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then can the government go further and further and further into into debt and the answer there is not exactly Congress
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determines our Congress determines they vote for how far into debt were allowed to go that limit is called ding ding
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ding the debt ceiling okay it was first enacted in 1941 and the first debt ceiling was set at 65 billion with a B
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$65 billion but as our country grew and as our country borrowed more Congress has voted time after time to raise the
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debt ceiling in fact there have been more than 90 unique Congressional votes to raise the debt ceiling but that vote
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isn't always easy some politicians they look at the situation and they think
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well aren't we in enough debt already why do we continue to operate at an annual deficit why are we spending more
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than we're collecting in taxes if we let this thing go on forever surely we'll
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get into trouble at some point you can't just go into debt forever and then they
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conclude and they say well I refuse to continue to enable this kind of Reckless financial behavior and trust me I
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understand that logic we'll get into a little bit later again we we'll talk
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about why that US debt isn't quite the same as your household debt and when politicians try to frame it that way
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they're not quite being honest but at the same time I do think there's a lot
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of Merit in our government instead of operating in an annual deficit trying to operate at a surplus or at the very
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least just trying to break even if you're only collecting 4 trillion in taxes maybe you should only spend 4
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trillion that year but anyway when enough politicians are thinking that way when they're thinking about that they
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don't want to continue enabling this bad financial behavior some form of a debt
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ciling standoff occurs because the treasury says hey guys we need to raise the debt ceiling in order to go further
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into debt and politicians will say no we're not going to vote for it you're
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spending too much we're sick of it so without permission to go further into debt the federal government would be
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forced to stop most of its daily operations and that was the risk that we were facing here in 2023 it's not the
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first time we've seen such a standoff it happened in 1995 1996 and that resulted
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in the federal government shutting down twice for 5 and 21 days respectively it happened in 2011 although the government
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didn't shut down however it was important to note that us sovereign creditworthiness
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was downgraded and the stock market took a significant hit okay what does sovereign creditworthiness mean well it
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means that other governments and other bodies and Pension funds and investors all over the world they look at the US
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government and they say how good of a creditor is the US or or rather how good is the us at paying us back if we give
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them credit if we lend to the US government are they going to pay us back on time now historically the answer has
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always been yes the US government is still looked at as one of the the best bodies to lend to anywhere on Earth but
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in 2011 that was temporarily like it came into question and the US debt was was downgraded and that affected
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investment markets so in summary the debt seiling even though it didn't cause
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the government to shut down those debt sealing issues did cause ripples throughout the financial World there was
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another standoff in 2013 resulting in a 16-day shutdown there was another standoff back in 2021 it did not result
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in a shutdown a government shutdown and then we had our debt cealing standoff here in 2023 so the next common question
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where do politicians stand we already went into that a little bit fiscally conservative politicians usually on the
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right-wing Republican party they're typically opposed to raising the debt ceiling or if anyone were to be opposed
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to raising the debt ceiling usually it would come from the fiscally conservative politicians they in general
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want to see less government spending for many reasons and they see government overspending as a root cause of US debt
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in the first place which I think makes sense US government spending is the cause of of our debt that or a lack of
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Taxation that said no one really wants to raise taxes right that's actually taxation was one of the things on the
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negotiating table here in 2023 between speaker McCarthy and President Joe Biden was the idea of well if we want to solve
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some of our debt issues we could just raise taxes now generally right-wing politicians are against taxes they want
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lower taxes and also a smaller government so the idea of raising taxes kind of didn't didn't was quickly
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chopped it hit the chopping block pretty quickly off negotiating table but anyway
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fiscally conservative politicians they're the ones who see raising the debt ceiling as further enabling a
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behavior that they want to see changed next question how can we allow this debt to continue to grow and at the
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same same time we should answer how the US debt is fundamentally different than household debt so the US debt is not
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like your debt government spending is not like your spending and there are a few examples to show and explain this
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the first one government spending is hugely stimulative for the economy as such when the government reduces its
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spending employment and wages fall both for the public sector so that's nurses
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and teachers police officers but also for sectors that you know private sector companies that provide goods and
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services to government an example there might be construction so reductions in government spending when the econ
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especially when the economy is already underperforming it can actually lead to higher levels of public debt and lower
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growth it can make the situation worse in other words and that's not really something that would happen in your in
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your household if you reduce your personal spending to get yourself out of debt it's not also going to reduce your
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income at your job at least most of the time for most jobs right your salary is your salary and your spending is your
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spending and there's really not too much interaction between the two as far as
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your spending somehow influencing your salary but with the government that's
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what what we're saying here is that's not really true when the government
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spends it often stimulates the economy in a positive way and that creates tax dollars for the government to then
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collect later that's fundamentally different from the way your household works
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another important point is that unlike a household the government has the powerful backing of a central bank
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behind it if the government and the Central Bank cooperate the central bank can help lower interest rates or
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borrowing costs against the government's debt and that's that's pretty good if if
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you're going to go into $32 trillion of debt it's nice to have a friend who can
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help control the interest rate of that debt and speaking of interest rates many governments including the US government
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it has invested vors every day waiting to lend them money at relatively reasonable rates every time that a bond
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is issued at well right now at four or 5% that's someone lending their money to
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the US government people are lined up there's an auction every day of US Treasury bonds people waiting to let the
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US government borrow their money why because the US government has reputation of paying back those loans on time with
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interest and people like the way that sounds your household does not have that you do not have people lined up at your
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door waiting to lend you money at reasonable rates if they're lined up at your door to lend you money they're
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going to lend it at unreasonable rates so big difference between the US debt and and your personal debt and
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ultimately you know at the end of the day the US government has the ability to print its own currency now that would be
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really bad if we printed our way out of debt that would lead to rampant global inflation so we don't really want to do
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that at least not in the short term we don't want to do it all at once but a
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lot of our treasury bonds are long-term 20 30-year bonds and over the long run that is essentially the plan of how
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we're going to get out of debt inflation is going to occur we know it's going to
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occur there's nothing we can do to stop it and it's not occurring simply because
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we are printing money but in the long run dollars will be devalued slowly but Sur early and paying back debt becomes
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easier and easier and easier that's a little bit different than the way that
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your household debt works at least most of it maybe the one way that there is a similarity speaking of 30-year loans is
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uh a mortgage a mortgage in some way is maybe the closest thing where we can tie
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US debt to household debt because with a mortgage I just got a 30-year mortgage last month so I can speak to this
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example I've got a couple thoughts there one is I'm hoping that my career grow
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over the next 30 Years and that's similar to the way that the US is hoping that its economy and therefore its tax
00:24:05
based grow over the next 30 Years but also there's likely to be inflation over
00:24:10
the next 30 years and that will affect my salary in a good way right you will earn more dollars simply because
00:24:17
inflation is occurring but my debt payment on my mortgage is fixed and similarly the government's payment on
00:24:24
its debt is fixed it's a fixed rate debt now the debt might be growing but each
00:24:28
individual bond has a fixed rate so the government is banking on the fact that it'll have more taxes and that inflation
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will also Drive its tax base up over the coming decades making today's loans
00:24:40
easier to [Music] repay so the next question we've already kind of touched on it but it's a
00:24:51
question that I've heard quite a bit over the last couple weeks is if the government is in $32 trillion of debt
00:24:57
then who is lending them all this money or who do we owe the $32 trillion back to and the answer is tons of people
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everybody well I shouldn't say everybody but it's tons of people all over Earth
00:25:10
it's individuals institutions Pension funds other governments anyone on Earth
00:25:15
who owns a US Government Bond or a bill or a note is lending money to the US government because as we've discussed on
00:25:23
the best interest before a bond is nothing more than a loan when you buy a bond you are loaning your money to
00:25:29
someone and in return they are promising you interest payments and then a full repayment at the end of the loan term
00:25:36
that's all a bond is every day the US government issues Bonds in an auction those bonds are gobbled up by Major
00:25:42
Banks and brokerage firms who then sell them on the secondary Market all over the world investing in US debt is big
00:25:49
big business okay what would happen if the debt ceiling wasn't raised well if it
00:25:56
wasn't raised a few things could Could Happen some of them are immediate effects and then some of them are
00:26:01
long-term Ripple effects some of the immediate effects would be that the federal government would likely shut
00:26:07
down until hopefully Congress is able to find a solution in the short run most federal jobs would be temporarily
00:26:15
furloughed and unpaid Federal contracts would be paused and again that kind of goes into that ripple effect of it's not
00:26:21
just public sector it's also private sector because a lot of federal contracts are given to private sector
00:26:27
contracts factors another kind of scary thing that might happen is Social Security payments and then Medicare or
00:26:33
Medicaid payments might be paused now that's a way to piss off a generation of
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baby boomers right there and you got to believe that Congress would get their ass in gear if they had millions of
00:26:45
people calling them saying where the hell is my Social Security payment now another thing that would happen a longer
00:26:51
term thing that would probably happen if we weren't able to come to terms in this
00:26:55
debt sealing crisis although maybe it's a short-term either way it would have
00:26:59
long-term ripples is that the US might miss or delay its Bond repayments and the US credit worthiness might get
00:27:06
downgraded again now we've already talked about this a little bit US Treasury bonds are considered the safest
00:27:11
investment in the world because historically the US has always paid its debts a debt sealing crisis could
00:27:18
potentially delay the speed at which the US repays its debts and that's a problem
00:27:23
is the US still the safest investment in the world at that point do investors need to be more concerned now that could
00:27:30
have far-reaching and mostly detrimental effects on bond markets and stock markets all over the world Warren
00:27:36
Buffett talked about how interest rates are Financial gravity affecting all financial instruments everywhere on
00:27:42
Earth then another famous quote is when the US economy sneezes the world catches
00:27:47
a cold in other words the US economy and US debt us bonds they're vital drivers
00:27:54
and influencers on the rest of the planet so if us bonds are questioned surely that would affect the global
00:28:01
financial markets and the global economy in most likely a negative way we will conclude this episode with the update
00:28:10
that you might already know which is that Congress suspended the debt ceiling altogether until 2025 in years past or
00:28:16
or previous negotiations they raised the debt ceiling to a specific dollar amount
00:28:21
but in this case they said eh we're going to kick the can down the road we'll talk about it again in a couple
00:28:26
years and so that's exactly what they're going to do thanks for tuning in to this episode
00:28:32
of the best interest podcast if you have a question for Jesse to answer on a future episode send him an email at
00:28:38
Jesse bestin interest. blog again that's Jesse ATB bestin interest. blog did you
00:28:45
enjoy the show subscribe rate and review the podcast wherever you listen this helps others find the show and invest in
00:28:53
knowledge themselves and we really appreciate it we'll catch you on the next episode of the best interest
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[Music] podcast the best interest podcast is a personal podcast meant for education and
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entertainment it should not be taken as Financial advice and is not prescriptive
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of your financial situation
