The Herald Bulletin

Afternoon Update

Local Business

January 19, 2013

'Big Joe' Clark: Don't overreact to debt-ceiling fiasco

The politicians in D.C. seem to have pageantry over just about everything these days.

While many of the laws passed by not only state legislatures but also federal lawmakers are in fact important, the context and the history behind them can often help us understand why they exist. Likely over the next couple of months, discussions of the debt ceiling will rule the news wires. This is a serious discussion and we certainly have opinions and recommendations, but this column is devoted to helping you understand the market more than politics. Much punditry and commentary will be spilled, so I think we should get our story straight before the winds of the major news networks try to sway us.

First things first: The debt ceiling does not give Congress the ability to spend more money. It does not hand over a blank check for them to do whatever they please. While Congress hasn’t actually passed a new budget in two years, the spending hasn’t stopped.

So if the debt ceiling does not allow Congress to spend more money, then what does it do? In the simplest terms, it approves the check to be written to pay for the spending that has already been approved. Imagine if you received a credit card with a limit of $5,000, you then charge $5,000 to your new credit card. When the bill comes in the mail you decide if you’ll pay it off or not. That’s essentially what Congress is doing, determining whether they will pay the bill to cover the spending that the house, senate, and president have already signed off on.

Seems fairly simple doesn’t it? Well, like most things that happen in Washington, both parties attempt to latch on other line items to bills that raise the debt ceiling. The important discussion of how much the U.S. government spends should ideally occur when voting on the actual budget but, as already noted, that hasn’t happened successfully for two years. Without a resolution, we could see a government shutdown.

According to Bianco Research, it wouldn’t be the first time the government has shut down; it wouldn’t even be the 10th time! Since 1976 the government has been shut down 18 times, the last being between Dec. 5, 1995, and Jan. 6, 1996. If this happens, the stock market will likely have a negative reaction. But we will survive, and there will be a light at the end of the tunnel. It’s just a question of how long it takes to reach it.

The debt-ceiling fiasco will come and go, market volatility will likely increase, and we have to manage our emotions and follow our investment discipline. There will always be drama in D.C. or unexpected announcements on Wall Street. Long-term financial success dictates that we learn to manage headline-generated “waves” in the market and recognize which ones truly matter and which are just ripples under our boat. Remember, some ripples even offer potential opportunities!

Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.

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