Observations on the Debt Ceiling Debate

In our most recent newsletter, we discussed our thoughts regarding fiscal responsibility in the U.S. We premised that the steps that had been taken by states and municipalities were just a precursor to steps which must eventually be taken by the federal government, that is, to create a fiscal policy which effectively balances the spending priorities of the country with its tax policy. We believe that this will be a long and difficult process, but one that is necessary for the continued success of our economy.

We are now witness to the acrimonious and seemingly endless debate about the Federal Debt Ceiling, which we have been told will be surpassed on next Tuesday, August 2nd. These debates and the political posturing of all parties involved, along with the breathless reporting by our media have driven many into a state of high anxiety.

It has been a long time since anyone has been serious to the point of action about our fiscal issues. Perhaps this apparent political brinksmanship is the price required to move in the direction of fiscal responsibility.

Many of our clients have expressed their concerns about this issue and we share their anxieties. However, we feel confident that there will be a solution, that is, the debt ceiling will be raised. The consequences of not raising the limit are unforeseeable and possibly grave; therefore, failure is not an option. We think it is likely, that at the very least, a temporary fix will be put into place before the deadline passes.

We also think that in the unlikely event that the deadline passes without an agreement, a negative market reaction would likely force Washington to act in some fashion to quickly remedy the issue, at least for the short-term. Further, if the deadline passes, we think there will be cuts to non-essential services before we stop paying interest on our debt, triggering a default.

With this in mind, and pending a resolution to this issue, we are not planning any changes in the positioning of our clients’ portfolios.  As of today, we think there is more risk in disrupting our clients’ long-term investment strategies than just simply riding out whatever potential turbulence may come in the unlikely event that Washington does not reach an agreement in time.

Having said that, if you have money invested that you will need in the short-term, there isn’t much point in exposing that money to any near-term risk.

Please feel free to call if you would like to discuss this further or if there is any specific action you would like to take in your portfolio.

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