In the 1984 classic, Footloose, there’s a scene where new kid/city-boy Ren McCormack is challenged to a game of chicken by tough guy/country-boy Chuck Cranston. The rules? Each drives a tractor full speed towards the other until one of them chickens out and jumps off. Ego forces them to participate in this display of proving who is tougher. (“I Need a Hero” by Bonnie Tyler is even blaring from a boombox in the scene, which is quintessential ‘80s.) As they start towards each other, Chuck is confident (and Ren may be also) that Ren will jump first because, being from Chicago, he is out of his element. However, in the world of movie scripts, Ren’s shoelace gets caught and even though he tries to jump, he can’t. He has no choice. Chuck ends up having to jump off and Ren is proven tougher. But is he really? Or did his shoelace just get caught?
This scene is the best example I can give for the silly charade of the looming debt ceiling crisis, or as I like to call it, “The World’s Dumbest Game of Chicken.” Politicians on both sides are out to convince you that they are smarter/better/tougher, when in reality, they just have their shoelaces caught.
Every few years, the US plays this game of chicken as we approach our national debt limit. To appreciate the stupidity of the tradition, it’s important to understand what the debt ceiling is, and why we’re constantly flirting with disaster by bumping up against it.
Like almost every country on Earth, the US spends more than it receives in taxes. To bridge the gap, we issue debt. Debt may have a negative connotation for consumers like you and me, but for a national government, some amount of debt is an inevitability. The earliest record of US public debt totaled $75,463,477 debt in 1791, thanks to the Revolutionary War.
It wasn’t until 1917 (during World War I) that Congress created the debt limit. The debt limit is the total amount of money the government is allowed to borrow to meet existing obligations. Those obligations include things like military salaries, Social Security, and interest on our existing debt. In short, things that must be paid.
It’s important to note that the debt limit does not authorize new spending commitments. It simply allows the government to pay the bills that Congress and presidents have already approved.
To be clear, the order of events is:
- Congress/the president approves spending.
- If spending exceeds tax receipts, we must issue debt.
- If we spend too much and our debt piles high enough, we reach the debt limit.
At this point, the options for Congress are clear: raise the debt ceiling to finance the spending they’ve already approved, or don’t increase the limit and fail to meet our obligations. Option #2 is potentially disastrous—military salaries/Social Security going unpaid and the turmoil in financial markets if the US defaulted on its debt would be catastrophic.
Fortunately, despite living on the edge at times, option #2 has never come to fruition. Since 1960, Congress has raised the debt limit 78 times—49 times by Republicans and 29 times by Democrats.
You see, the ceiling is not really a ceiling. It’s an opportunity for politicians to grandstand. It’s a chance for their social media manager to garner internet clout with snarky tweets. It’s an occasion for both sides to insist that we wouldn’t have to worry about the debt ceiling if they were fully in charge because the nation’s finances would be managed responsibly. The “ceiling” is an upward-drifting illusion, whose only real purpose is to remind us how disappointing our political “leaders” are.
Most people yearn for fiscal responsibility from our government. Whether that comes via higher taxes, promoting economic growth, or reducing spending on social safety nets and/or national defense is probably up to your political leanings. The problem is that neither side wants to make the tough, but necessary decisions, even though we know that ignoring problems only makes them worse.
I don’t know exactly how this year’s game of chicken will play out. I do know that we’ll have to endure mind-numbing political posturing before it concludes—and we won’t even get to listen to Bonnie Tyler while we do.
As cynical as I am about politics, I’m immeasurably more confident in capitalism and the resiliency of financial markets. Sure, the potential volatility due to the World’s Dumbest Game of Chicken is daunting, but daunting is nothing new.
In the last three years, we’ve experienced a pandemic the likes of which hadn’t been seen in 100 years, two bear markets, the worst inflation in four decades, and the largest war in Europe since World War II. In that time, the S&P is up 30%:
Re-read those last two sentences. If your investment process relies on predicting outcomes, it is destined to fail. The better approach is to acknowledge that crystal balls are for fairytales and movie scripts. Rather than forecasting an uncertain future, prepare for a range of potential outcomes. Then construct a portfolio that allows you to stay on track, benefitting when positive ones occur and surviving when negative ones occur.
If you know someone that’s worried about their finances, please have them reach out. Our team at Truepoint and Commas is ready to help. We may not be able to help you operate a tractor in a game of chicken, but we can help crystalize your goals and implement a plan to achieve them.
Disclaimer: Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.