The US debt has nearly tripled to about $31.4 trillion over the past decade. This is a result of the increased expenditures that Congress has authorised over the past ten years. As a result, the US government frequently needs to raise their borrowing levels in order to pay off the debt. This has resulted in them running into the imposed borrowing limit, also known as the debt ceiling.
The debt ceiling has been in place since 1917 which limits the total outstanding debt that the government may incur. However since 2001, the US has been operating ~$1 trillion per year above what it receives in taxes and revenues. Hence, the government has to borrow more to continue financing the payments that have been authorised.
In May 2023, there were increased fears about a debt default and its potential repercussions on the market. With so much conflicting information and news, it can be challenging to know what steps to take as an investor. That’s why we’ve put together this guide to help you navigate the current economic landscape with ease. So buckle up and get ready for a deep dive into the recent US debt crisis!
US Debt 1st Key Takeaway: Expenditures have been exceeding revenue over past two decades
Over the past 50 years, the government has only had a surplus for its annual revenue five times. The most recent surplus year being 2001. Hence, this annual deficit is nothing new to the US. According to the Treasury Department, the United States has actually been in debt ever since it was founded. Over the years, wars, economic downturns, and the Covid-19 pandemic have led the debt to skyrocket.
To put into perspective, the US federal debt has increased from $408 billion in 1922 to over $31.4 trillion. That is an 80x increase over the span of 100 years. Unless the government identifies where it is overspending and changes it, this problem appears to persist.
US Debt 2nd Key Takeaway: Debt Ceiling has been raised multiple times in the past and will likely increase again
Despite the multiple debt ceiling rise, it is important to note that the US has never experienced a debt default. More than 58% of the global foreign reserves are in US dollars. This is a key reason why the US dollar remains the strongest currency in the world. All US bonds issued are perceived to be of full faith by the US government. This is often regarded as the gold standard of financial security. In the event that this faith is broken, the implications on markets in commodities, stocks and bonds are unmeasurable.
Raising the debt ceiling appears to be the US’s “fail-soft” strategy over the past few years. This is simply because of their desire to prevent the implications of a US default. Thus, raising the debt ceiling will be the simple way out. As a result, the ceiling has been raised by the Congress seventy-eight times since the 1960s. This looks to be the only option unless there is a substantial adjustment in the US budgetary policy making.
US Debt 3rd Key Takeaway: Identify good pockets of Investment opportunities despite market uncertainty
Despite the common occurrence of rising debt ceiling, we should never take it for granted. It is also wise to be prudent and wary at such market uncertainty. Taking a look into the US market, it has been somewhat flat in April and May due to the debt uncertainty.
Therefore, as investors, this is also the time when we should look for long-term investment opportunities. This would be the ideal moment to hunt for value and well-managed companies.
A great example would be the Alphabet and Amazon stock. Both stocks were hovering at about US$100 over the past 2 to 3 months. Now both stocks are sitting at about 20+% in profit. If you hadn’t already made investments in such fantastic companies, that could have been an opportune moment. This echoes Warren Buffet’s advice to “Be Greedy when Others are Fearful”.
The recent US debt crisis has been a difficult situation to navigate for new investors. Hence it is important to comprehend the potential impacts of this financial occurrence. From learning about the past similar occurrences and their repercussions, we hope to prepare you better for similar events in the future. With sound preparation and awareness of market conditions, you’ll be more likely to come out ahead with an improved financial position.
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Disclaimer: The information provided by LearnToInvest serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.