The Debt Ceiling

Several clients have contacted me in the past few weeks expressing concern about the approaching deadline to raise the nation's debt limit.

The Treasury Department has indicated the limit must be increased by next Tuesday, August 2, or the country may default on its obligations. Unfortunately, as of today, with one week to go, our elected leaders have still not been able to craft an agreement that will increase the debt limit.

Analysts have been speculating about the impact a default could have on the financial markets. No one really knows, because the United States has never defaulted. But clearly the effect would be negative and perhaps severely so.

I would not be surprised if the stock and bonds markets both dropped fairly dramatically, if it were to become clear that Congress and the Obama administration will not reach a deal.

However, as has been the case with our other events that have shaken the market -- remember when the markets opened after the September 11, 2001 attacks or when Congress voted down the Troubled Asset Relief Program in September of 2008? -- I expect the markets would recover and in a relatively short period of time.

I have read that some investors have decided to get out of the markets until this situation clears up. This approach assumes that we will actually know when things are stable again and when it's safe to re-enter the market. I know I do not have the ability to see into the future.

Moreover, the nation's financial predicament involves much more than another increase in its debt ceiling. (There have been 74 increases since March of 1962.) The government spends considerably more than it receives in revenue. We have a national debt that is nearing the total annual productivity of the country and, if not soon addressed, will simply dominate the nation's budget. Congress and the administration have to address this imbalance or the nation will be facing the kind of austerity measures that are currently being implemented throughout the Europe Union.

I have recently read three books on the history of crashes and depressions in financial markets. I was struck by how often these events occur and by how quickly the markets recover. While we cannot predict market events, we know they will occur and we know that eventually the markets heal.

Intelligent, long term investors need to remain disciplined and resolute in the face of these events. I realize this is not particularly comforting. But I know there is no better approach.