Between June 5th and the end of September this year, the U.S. government is scheduled to reach it's debt ceiling. Listen in to this special bonus episode to know what this means, how this will affect the economy and why there could be a government shutdown as a result of this. You don't want to miss this!
Welcome to the Financial call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome to the Financial call. My name is Zack Cole. And I'm here to talk to you about something going on right now within the current economy. Normally we do the guided path series, which is a series that helps people understand long term financial topics, helps them understand how to retire, how to think about taxes, all of those episodes are what we call evergreen, you should be able to listen to them in a year or two. And the information should still be very applicable today is completely different. I want to let you know about something coming in the news so that when it does, you will understand the significance of it and the definitions and understand the issues around the debt ceiling. So today it is April 21. And sometime between June 5, and the end of September, the US government is scheduled to hit the debt ceiling. So this has some major impacts to the economy, not just the government. And it actually impacted our advisory firm back in 2018. Not in a way that put us at risk or anything like that. It just didn't allow us to do an application that we needed. So I'll tell you that story here in a minute. But first, you need to understand what is the debt ceiling? And what is a government shutdown. So the question really is, why am I hearing about a government shutdown. And I've written a really short article, if you'd like to review this at a slower pace on your own time with a few images that will be on the financial call.com. And it will be on Capitol financial network.com on the Education Center. So what is going on right now? And why am I going to hear about the federal debt ceiling and a government shutdown? Let's first talk about how the US makes income, how we spend money, and then how the federal debt and federal deficit works. And that way, you'll understand a little bit more here. So first, the United States federal government makes money through taxes. So far in 2023, this is the first quarter of the year, the government has made a lot of money, $2 trillion on taxes, most of that is individual income tax, and then Social Security and Medicare taxes follow. So individual income taxes are fascinating. If you actually look at who is paying individual income taxes, the numbers are quite staggering. We won't get into a ton of detail here. But most of the taxes are paid by a smaller group of people. So there is definitely a wealth equality argument that is happening right now. But most of us most normal people, your tax rate is somewhere between 10 and 22%. And that's a lot better than it has been in the past decades ago, the top tax bracket was 90%. At that point, you just stop working. But let's go back to the main topic here. So the government makes income off of individual income taxes, Social Security, and Medicare taxes, and those to Trump all the other sources by far. So you have things like corporate taxes, excise taxes, estate, and gift taxes. That's the death tax. But generally, it's basically income taxes and Social Security and Medicare. So each year that income comes in. And over the last five years, that's gone up by about 18%. So it was 4 trillion back in 2015. And it was almost 5 trillion in 2022. So the income of the US is going up, because more people are making more money, paying more taxes, and therefore the income of the government goes up. So just like any household, they have income and they have expenses. The federal government spends money on things like national defense, health care, education, social services, things like that. However, sometimes, and let's be honest, it's more like always, the government spends more money than it makes. And this is super counterintuitive, because if any one of us constantly spent more money than we make, we would eventually go bankrupt. However, the government is a little bit different. They have the ability to borrow and continue to borrow. And the other thing is they have the ability to tax so like if your job let's talk about your job, if you spent more than you made, but you just had the freedom to say, next year let's just make more and all you have to do is sign a few documents and your income goes up by 15 or 20%. Then spending more than you make might actually be okay at times so that you can help grow your local community. For example, let's say your spin Earning a lot of money donating to helping build roads or build buildings and things like that, that create opportunities for jobs that also create taxes that increase your income. So spending money to increase income can be helpful. And this is not meant to be political. This is meant to tell you how the math works. So I'm not saying the government should be spending more should be spending less, I'm just saying, there is an argument as to why it works. Now, to what level that's left up to politics to determine what's best. But I just wanted to maybe have you think about it for a second, that it's different than a household that the federal government can spend a little bit more because they can increase their income at just about any time they want. Whereas the rest of us have to try to get a promotion or starting a business or do things like that, to increase our income. So if the government takes a certain amount of income, which is called revenue, and then spends a certain amount, and that spending is always greater than the income, the difference between those two numbers is the federal deficit. So that's the annual amount that is extra of basically borrowed money that they had to come up with. Now, there's also a law that says the federal government cannot borrow over a certain amount, that's the debt ceiling. So each year the deficit, the difference, the extra spending annually, piles on to the federal debt. And then the federal debt keeps growing and growing and growing, until it reaches the debt ceiling. If the federal debt reaches the debt ceiling, and Congress doesn't come in and say, Hey, we're okay to raise the debt ceiling by this amount, then the government has no option but to cut expenses. And this has happened quite a few times. So when the government cuts expenses, they are in what's called a government shutdown. Okay, so all those terms, let's go back. So the income is revenue, then you have federal spending, the fact that we spend more than we make as a government is the deficit, the deficit adds to debt, the total debt keeps ballooning getting bigger, and it increases until it reaches the debt ceiling, at which time Congress has to go in and make a decision as to whether or not they're going to increase the debt ceiling. It's just so convenient and nice that here in this country, our political parties are just so close to each other and thought that it's so easy for them to make decisions, right? Obviously not the case, we're about more polarized than we've ever been. So it's harder and harder for governments to come together. And at times, this conversation around raising the debt ceiling becomes a political tool to ensure that political parties are able to push one or two things or more that they really care about, and somewhat hold them as bargaining chips here, until they allow the debt ceiling to go up. So inevitably, it seems that the debt ceiling gets increased. But the other option would be the government could just stop spending. But then those portions of the government that were shut down would be shut down permanently. And that has some major effects. So let me tell you a little story here. capita financial networks started back in 2007, or eight, Mike a little Doug started our firm, and he grew it and grew it. And I joined back in 2015, we affiliated with a larger registered investment advisor firm. And as we grew, it made sense for us to break off and become our own advisory firm. So in 2016, and 17, we put together what we needed to make that happen. And we went to file with the Securities and Exchange Commission, in the very beginning of 2018. We've had government shutdowns over the past 40 years, there was one in 1980 8184 86. A lot of those were one day. In fact, in 84, it was four hours 86 It was four hours. But the longest ones have been back in 1995. It was 21 days. And then in 2013, it was 16 days. But the very longest one we ever had was the beginning of 2018, where we went through 35 days of shutdown. Now, that was the exact time we submitted our application to become a registered investment advisor firm. And it was fine. We could just keep operating under the entity that we were under. But man that was a bit frustrating to send in the application. And a couple days later have that entity completely shut down. So it was fine. And again, it didn't impact our business at all. But it can impact many businesses who aren't already operating who would like to start or would like to have growth. And they estimated the cost to the government of that 35 Day shutdown to be $5 billion. So this is not a minor thing. This is a big deal when the government has to shut down. So they raised the debt ceiling at that time. Our application went through. We were approved shortly after Drew, I think it finally officially came through in the beginning of April. And we were able to file as our own registered investment advisor firm, which didn't change much for our clients. But it changed a few things for us in terms of having a little bit more control over our branding and reputation and being able to make sure that people had a better experience with capital. So we were excited about that. Something to understand back in 2011, there were talks about a government shutdown and the debt ceiling not being raised and the fact that our political parties were not able to come together and raise the debt ceiling. This is on August 5 of 2011. Standard and Poor's, which is the s&p in the s&p 500. If you know about that index, it's one of the most popular indexes to measure the US stock market. Standard and Poor's measures a lot of things in fact, they rate a lot of things. One of the things that they analyze and give a rating to is US government debt. So they had a certain status like a credit score for the US in terms of its ability to pay its government debt. And on August 5 2011, Standard and Poor's lowered the US credit rating, this was the first time that had ever happened by one notch. And I was I remember, I was in the industry. And I was talking to clients about it. And it was unprecedented. It is interesting, though, all things in perspective, it went from triple A to an A plus. So it was like being a perfect a student to getting an A minus at some point there. So it wasn't like it was dire. It wasn't like it was a big problem. But the fact that it even was considered and downgraded slightly, did cause some market volatility and people to be concerned at that time about markets. So again, the solution here is the government is either going to stay shut down for long periods of time, which costs the government money, or the government can raise the debt ceiling, or it can find ways to cut spending. And nobody really wants to cut spending either political party, and if you look back over in the article actually have an image that shows Republican controlled Congress, a Democrat controlled Congress, and a split Congress, and the debt ceiling just steps up, no matter who's in office. And this is from 1981 until it shows up until like 2011. So that was just nice little image to show that it really didn't matter too much, which political party was in office, and it steps up pretty consistently. Anyway, the point is, the debt ceiling does get stepped up does get moved up, but it could cost the economy some money. If it is delayed. It could also include other political non financial agendas being pushed simultaneously as the want to push them across and use the debt ceiling as a little bit of a being held hostage to those things. We'll see what happens. Just in general, the US government debt hasn't been downgraded recently, that was back in 2011, things have stayed pretty steady. When it comes to portfolios, I would expect a little bit of volatility here in the near term. You're not hearing about this a whole lot yet, because we're not that close. And in the news, it's not quite as exciting for the news to be broadcasting something in June to September. But you will start hearing more and more about this over time. So hopefully that helps you do a quick recap, is a really short episode just to help you understand the news. So you understand what's going on in the future. June 5 to the end of September, somewhere in there, we are scheduled to hit the debt ceiling. Remember, the government makes income through taxes. And then we spend more than we make. That difference is the annual deficit, the deficit piles on to the total federal debt until they hit the debt ceiling. When they hit the debt ceiling. Governments have to find a way to not spend money so they start to shut things down. And this could be like national parks, we talked about the application with the Securities and Exchange Commission that we needed to file. It could be other services. And anyway, so the government shuts down. And that's what they mean by a government shutdown. And most the time, it's partial and in different pieces. So don't think that all of a sudden, you're not going to be safe because the police department completely stops or something like that. They're calculated with where they shut down. And it's non essential things at first, but the bottom line is, the government shutdown can be fixed with raising the debt ceiling and getting a higher budget to be able to spend more, or they can find other ways to cut expenses, which is less likely I'd be very surprised to see that happen long term. If you have any questions reach out to us at capita, you can find this information on the financial call.com or capita financial network.com. Again, just a quick short episode. I'm hoping to do this every once in a while to help people understand what's going on in the financial news. I've always wanted someone to help make it easy for me to understand it, and I've never really found it. Hopefully this is helpful to you. Thanks.
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