Should You Really Fear a Government Default?

Dear Bridget,

Is there anything we can/should do about the pending debt-ceiling deadline?  Should I be getting cash out of the bank to pay for bills and groceries, for example?  A recent article I read makes me kind of anxious.  It says that if the politicians don’t figure something out, banks will be SOL leading to a massive cash-run on banks.

What do you think?

This isn’t a dumb question!

With the pundits out there beating fear drums, it’s difficult to ignore the drama playing out in Washington.  Talking about a run on banks is a doomsday prediction.  The markets, banks etc., are not going to be blindsided by this, so I think a doomsday scenario is unlikely.  Many people seem to assume that if the interest isn’t paid to bondholders, the bonds will immediately become worthless.  However, they won’t be worthless.  I think instead of being worth 100, they will be worth something less, like 98.

Please allow me to digress with a recent personal experience. Lately, I’ve been very stressed.  My dear husband and I are attempting to sell our house, buy another one, and move.   Two weeks ago I was at maximum anxiety.  I couldn’t stop thinking–what if it doesn’t go through on the day we planned? I broke out and couldn’t sleep.  Then, the deal didn’t go through on the day we planned.  We adjusted.  Actually, it meant that both us could attend my annual family campout, which was fun.  The deal getting delayed wasn’t that big of a deal.  The experience made me realize three things:

  1. Most of what we fear doesn’t happen;
  2. When what we fear does happen, we deal with it better than
    we anticipated when we were stressing about it;

  3. What derails us are the events that we don’t
    anticipate-when the earthquake and tsunami randomly strike.

Using the system that I work with (called functional asset allocation), you invest your net worth mindful of protecting yourself against different things that can go wrong.  You also protect against the “triple whammy” (when 3 things go wrong at once.)  I encourage clients to control the things they can control (their savings, spending, and net worth allocation) and let go of the things they can’t control (interest rates, market returns, and politicians.)

That being said, interest rates will probably go up.  You don’t have to have a PhD in economics to realize that interest rates are at historic lows; pretty much all they can do is go up.  So, for instance, if you’re planning on buying a car on credit, that might be one reason (and only one reason) to buy it now rather than later.  However, if you don’t need a car, or one of many other reasons not to act now applies to you, don’t do it.

When trying to sift and winnow through the financial punditry, remember to follow the incentives.  Politicians, writers, and newscasters know that fear can motivate your reading and viewing habits.   Generating fear generates business.   If writers want to seem relevant, they have an incentive to generate fear.  The politicians and the pundits are benefiting from this crisis right now.  When the incentives change, the crisis will be resolved.

Want to see a humorous take on this subject?  Check out Ken Robinson’s “It Won’t Go to Zero.”  While Ken wrote and produced this rap about the stock market crash, IMHO, it applies nicely to the current crisis as well.

About the author

Bridget Sullivan Mermel, CFP®, CPA

Hi. My name is Bridget Sullivan Mermel. I started a fee-only financial planning firm, Sullivan Mermel, Inc. We especially enjoy working with attorneys, small business owners, near retirees, and clients interested in socially responsible investing.

We practice in a small niche of the industry called fee-only, which focuses on giving un-biased advice. We don't take commission, get kick-backs, or sell products. We have no hidden agendas. Our focus is on giving our clients the best comprehensive advice possible.

I started out with a tax practice in 1997. I could see that clients wanted and needed help not just with their taxes, but with other areas of their personal finances, too. When I found out about fee-only advising, with its emphasis on giving bias-free advice, I was hooked! I love helping people understand and improve their fiances.

I worked as manager and district manager during the start-up phase of Starbucks. I also worked supporting high profile litigation and in the back office of a derivatives firm.

I have a BA in Accounting and Marketing from the University of Wisconsin, Madison and a Masters in Liberal Arts from DePaul University in Chicago. I am a Certified Financial Planner™ as well as a Certified Public Accountant.

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