The United States government has officially hit the debt ceiling of $14.3 on Monday, 16th May 2011 (U.S. time). Treasury Secretary Timothy Geithner cited that he will suspend investments in federal retirement funds until August 2nd so that the government can continue borrowing. Beyond this period, the Congress has to either raise the debt ceiling or the U.S. government has to default on some of its debt obligations.
For the first option of Congress raising the debt ceiling, the government will be able to borrow more money till the new debt ceiling that is going to be set is reached. However, the question is how long can this go on? How long can the Congress keep on raising the debt ceiling? Since March 1962, the debt ceiling has been raised 74 times and 10 of those times have occurred since 2001. This cannot go on indefinitely and the future generation has to face grave consequences of this action. The U.S. government will just continue digging a deeper hole to bury itself. The markets will then lose confidence in the ability of the federal government to repay those debts.
For the second option of U.S. government defaulting on its debt, investors may lose confidence much more quickly in the U.S. government and this will create a mega catastrophe that is going to be worst than the subprime crisis in 2008. The world markets will plunge and unemployment will hit the roof. Remember also that U.S. dollar is the reserve currency of the world. If U.S. defaults, the confidence in the currency, which is already waning, will drop even further.
Either option does not bode well for the U.S. government. Raise debt ceiling and you dig a deeper hole that has to stop some point in the future. Default and you will cause a major financial tsunami. Personally I feel the latter will be a better option for U.S. so that they can start from a cleaner slate and at least try to put a stop to the debt problem.
As for my stock investments, I’m thinking of liquidating some of the stocks that are overvalued and sit on cash. I will monitor the U.S. debt situation closely and act accordingly. But I will always keep in mind that time in the market is more yielding than timing the market.