Recurring worry about the debt ceiling limit caused US stock markets to drop, with the S&P 500 down 4.7% in September, basically giving back the gains they made in August.
Most governments in growing economies borrow money to fund the services they provide. America is one of only two countries in the world that has a declared debt ceiling (Denmark is the other). If US debt grows too much, both Congress and the Senate must pass legislation to suspend or increase this limit. And if the limit is breached, further government payments must stop immediately – including salaries for government staff, Social Security payments, and interest on their debt. America would then be in default.
Both Republicans and Democrats would agree that default is an embarrassingly poor outcome. It is incredible to think they would allow such a harmful event to occur. Most of the time the debt limit is raised without any drama. In fact, it has been raised or suspended 78 times since 1960. The occasional posturing – as is happening right now – is more about who to blame. In the short term, markets take the brunt. This time both sides agreed on a short-term increase to the limit, but that will only last until December. And then the drama will begin again.
In times like this, it is important to tune out the short-term political noise and remember the long-term potential of owning good businesses. Yes, market fluctuations will always be with us, but so will good businesses that continually improve and grow.
