What can happen to your money if the nation goes into default?
Tue, 26 Jul 2011 18:51:17 GMT —
The deadline for Congress to extend the debt ceiling is just one week away, now many people are wondering what it would mean to them if the nation does go into default. Here are some of the answers, and how you can prepare.
One week from a potentially debilitating debt crisis, Democrats and Republicans clashed Tuesday over rival plans to slash spending and increase the nation's borrowing ability despite President Barack Obama's endgame appeal for compromise. Financial markets registered their nervousness with the stalemate.
Even as hints of progress seemed hard to find, Gene Sperling, chairman of the president's Council of Economic Advisers, said this was no time to be engaging in "doomsday scenarios." At the same time, Sperling reiterated Obama's previous statements threatening to veto legislation with no more than a six-month extension to the debt limit, but he didn't directly renew the threat when asked about it in a broadcast interview Tuesday morning.
Hitting the debt ceiling is the talk of the nation's capital, but is it really the talk of the town? Personal finance experts say by then it may be too late.
"If that worse case scenario plays out then you need to start bootstrapping and saving as much as you can today," says Farnoosh Torabi, a personal finance expert.
Washington's failure to reach a debt limit deal could mean a jump in interest rates, a dipping dollar, loan difficulties, and delayed social security payments. Some people could be forced to tap into their nest eggs for fast cash.
"If that's the only place I can go to get the quickest amount of cash without paying ridiculous finance loans, I would be the first person to do that," says Natalie Herring.
Experts say right now if you're a young investor - if you can - don't stop contributing to your 401(k).
"Yeah, these talks are a little scary, but don't let that deter you from investing in your future. If you have time on your side you can afford volatility in the stock market" says Torabi.
For older investors, it's time to have cash on hand and diversify out of the stock market on oil, gold, and sugar.
"If the commodities market goes up in response to a screwed up debt deal in Washington, that's screws up your 401(k). If you're not busy trying to trade your way out of the 401(k), you already have a position on in the commodities markets" says MSNBC's Dylan Ratigan.
In the coming days, keep your eye on the price of gold. As gold prices go up, people are more pessimistic. As gold prices go down, people are more optimistic. That's the best sentiment indicator that exists in the financial market right now.
Obama has said he would not sign a short-term extension of the debt ceiling, but on Monday he stopped short of issuing a veto threat. Still, he said, a six-month-long increase in the debt ceiling would allow Republicans to try to force their will once again, demanding "harsh cuts" in program like Medicare and refusing to allow tax increases on the wealthy.
"Based on what we've seen these past few weeks, we know what to expect six months from now," the president said. "Once again, the economy will be held captive unless they (Republicans) get their way."
Credit rating agencies such as Moody's and Standard & Poor's have threatened to downgrade the United States' gold-plated AAA rating if Congress and the White House don't extend the debt ceiling and take steps to bring long-term deficits under control.
While both plans would increase the debt ceiling, ratings agencies have said a short-term increase such as the one proposed by House Republicans may not be enough to protect the U.S. from a ratings downgrade. What's more, neither plan offers the larger deficit-reducing assurances that credit ratings have said they need for the U.S. to retain its place as one of the most secure investments in the world.
Are you concerned about the nation going into default? If so, what will you do? Leave a comment below and tell us about your situation.
Information from the Associated Press and NBC News was used in this report.