How to Invest as a Debt Ceiling Crisis Looms (Published 2023) (2024)

Crises are always lurking in financial markets. I’m worrying about a possible recession, rising interest rates, rampant inflation and the continuing economic effects of the war in Ukraine and the Covid-19 pandemic, but I have been for months.

Now, it’s time to add to that list the threat of a catastrophic breach of the federal debt ceiling, which could conceivably come to pass sometime this summer. Even now, with the odds of an eventual crisis clearly rising, it is difficult to accept that it might really happen.

“Breaching the debt ceiling has always been unthinkable,” said Edward Yardeni, a veteran independent Wall Street economist. “Now, I’m afraid we’ve got to think about it.”

Thinking about it doesn’t mean panicking. Even in a crisis, I buy and hold diversified investments in the global stock and bond markets, preferably through low-cost index funds. That’s a well-tested approach for long-term investing. It makes sense as long as you are able to withstand market turbulence and hang on for decades.

But your risk tolerance will surely be tested later this year, if the government exhausts the capabilities of “the extraordinary measures” that the Treasury Department said it began using on Thursday. Through these technical maneuvers, the Treasury is stretching out its cash reserves and delaying the moment of reckoning when the U.S. government runs out of the money needed to pay its bills. “The X date,” as it is being called — the absolute, no-kidding, deadline for the lifting of the current $31.4 trillion debt limit — is expected to arrive sometime in the second half of 2023.

Buckle Up

Breaching the debt ceiling is entirely avoidable, of course. All Congress needs to do is increase the statutory limit on U.S. debt, and the problem will disappear.