How the Debt Ceiling Debate Matters to Your Money

Why you need to worry about your safest investment

Ric Edelman: It's Wednesday, May 3rd. My social media community now has 100,000 followers. Thank you. Visit me on Facebook and Twitter and LinkedIn and Instagram. I respond to a lot of those comments and questions. You'll find links to all of that in today's show notes. And I want to ask you a favor. Please spread the word. This podcast is already in the top 1.5% of all podcasts in America. There are more than 5 million podcasts. So I'm very excited at the success of this show.

But if you want this show to persist, we need to build up the number of followers. Please share it with your friends and family and spread it out on social media.

One big topic that I've been getting from my followers on social media is about cash lately. “TINA” is dead, Remember, TINA, “There is no alternative”. Tina came about over the past several years. People were wondering how is it possible in the middle of the pandemic that the stock market is doing so well? The reason is because interest rates were so low. If you wanted to get a decent rate of return, you couldn't go into bonds because they were paying zero point nothing. You couldn't go to bank accounts; you couldn't go to money market funds. All of those were paying zero point nothing. So there was no alternative. “Tina People” had to buy stocks because a lot of those stocks paid three, 4% dividends and the stocks were growing well. 

So why put money into an account, a Treasury Bill or a bank or a money market that's paying zero point nothing when you could put the money into the stock market and get a much better return?

Well, TINA is now dead because today interest rates are so much higher. You can get 5% from a six-month treasury. Ordinary money market funds are now paying 4%. And with the recent government shutdowns of Silvergate Bank, Signature Bank and Silicon Valley Bank, people are worried about their bank accounts and therefore are turning elsewhere to get better rates of return than those bank accounts were paying anyway. Hundreds of billions of dollars in just the past month have been withdrawn from US banks.

And there's a new player that has just come onto the scene, Apple. Apple has partnered with Goldman Sachs to offer a new savings account. It's paying 4.15%. Compare that to the average bank account that's paying 0.37. Everybody always wondered what would happen when the big tech companies Amazon, Google, Microsoft decided to get into the game. Well, guess what? Apple is in the game and they're taking it by storm.

And then there's the entire money market fund industry. In just the past two months alone, investors have placed $500 billion into money market funds. I mean, why take the risk of the stock market when you can get 4% from a money market fund?

But I want you to remember that money market funds are not risk free. And in fact, there's a new threat to them - the federal debt ceiling. I want to ask you one and a half questions. The first question, will there be a federal shutdown this summer because of the federal debt ceiling? You've heard what's going on. Congress is recognizing that the federal government's ability to borrow money is reaching [00:04:00] a ceiling imposed by federal law. And the Republican are saying they don't want to raise the debt ceiling. The Democrats are saying you have to. If they can't reach an agreement on the federal budget, the government could be facing a shutdown. Do you think that will happen? And if it does, how long will it last?

We need to recognize that this is an open political question right now. A lot of people offering a lot of opinions about what is going to occur this summer. Even if the government shuts down for just one day, there could be a big problem for money market funds and for short-term Treasury bills. The reason is that if the government shuts down any Treasury bill that matures during the shutdown, it technically would be defaulted. The government is closed. It doesn't have any money. It doesn't have the ability to pay back the investors of those T-bills.

And a big T-bill buyer is our money market funds. And this is why many institutional investors are saying don't buy any Treasuries that mature in late July or early August because that's about when the government is expected to shut down. If it shuts down, that's when the government runs out of money. If Congress and the White House can't resolve this issue now, it might be easy for you and me to say, “No problem. I won't buy any Treasuries that mature in late July or early August. I'll buy Treasuries that mature in early July or into September.”

But if you have a money market fund, that money market fund probably doesn't have the flexibility that you have to own Treasury bills and it has to “mark them to market”. Meaning, if a Treasury bill comes due during the shutdown and it is owned by a money market fund, that Treasury technically could default and that would force the money market fund to market to zero in default. That could force money market funds to “break the buck”, meaning that while money market funds are widely known for always being worth $1 per share, suddenly they might have to mark themselves down to $0.99 or $0.98 per share. That could create panic in the marketplace. People who own money market funds who are unsophisticated investors and don’t understand how money market funds work could be shocked to discover that their money market shares, which have always been $1, are suddenly worth 1 or 2 pennies less. 

Could they become fearful that they could have further losses? Could this cause people to demand instant selling of their money market fund shares, getting their money out of those accounts, creating a run? And if they do create a run, this could force the money markets to sell the securities in their holdings quickly and urgently.  And what might that do to the value of those underlying securities? I could be making all of this up.

My point is, we don't know what's going to happen this summer. We haven't faced this kind of a situation before, and we're not exactly sure how it's going to play out. Most folks, quite frankly, are expecting calm heads to prevail in Washington, that the Republicans and Democrats will get their act together. They'll figure out a solution and prevent any of this from happening. I'm simply saying you need to be aware of this. If your fund does break the buck, it's going to be because of this short-term government shutdown. Nobody's expecting a shutdown at all. Those who are aren't expecting one to last very long. And ultimately, any treasuries that default during the shutdown ultimately would be repaid by the federal government at 100% face value. 

Nevertheless, that's assuming people all understand what's going on and why. If there are people out there who own money market funds, who are unfamiliar with what's happening and they simply react to the latest headline, there could be panic in the marketplace. You need to be aware of this. You need to talk to your financial advisor about this.

If you are a financial advisor and you have clients who own money market funds, you need to talk to them now, prepare them for what's coming this summer so that people have expectations and clarity and that will go far to avoiding and reducing any panic in the marketplace.

Hey, today and tomorrow I'm in Boston at the Tiburon CEO Summit. Investment Management CEOs and other leading executives in the financial services field are powwowing together. We do it every six months, a couple of hundred of us. And I'm really excited about being in Boston. I'll be here today and tomorrow. I'm really excited.

 Also about Friday's show, Cal Thomas will be joining me on the program. Cal is one of the longest running columnists in the country. I think he has the record for his syndicated column. And he's just written a new book, a retrospective on his 50-year career. Be sure to join me on Friday with my conversation with Cal Thomas.

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