Money Rehab with Nicole Lapin - Decoding the Debt Ceiling and How it Affects Your Investments

Episode Date: January 11, 2023

Nicole explains the biggest financial news of the week: decoding the debt ceiling, and the latest on inflation. Then, she tells you how these headlines will affect the markets, and therefore, your investments and retirement accounts.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. It's time for some money rehab. Let's take a pulse check on the financial world. Today, I'll be covering the two biggest stories in financial news you need to know.

First, the debt ceiling. This is a story that's going to be haunting the markets for much of the year to come. According to The New York Times, President Biden and Congress could be on track later this year for the most, quote, perilous debt limit debate since 2011. Let's double click on the debt ceiling. Because the way we fund our government is one of those uniquely American things that we assume was developed from a place of logic or reason or necessity, but actually wasn't, like yellow school buses and spray cheese. And in line with many American traditions, it's also not quite as old as we think. The debt ceiling actually grew out of Congress's need to fund the Panama Canal in World War I. Before that, any funding was approved at the same time as it was needed. But since costs of the first war were expected to be so high,

government leaders at the time thought it would be better to just approve the spending in bulk rather than as individual expenditures. A hundred years later, we are still funding our government this way. The debt ceiling just approves funding for laws and prior commitments that the government already has. Not approving the debt ceiling wouldn't cut spending. It would just force the government to default on commitments it's already made. Now, as you know, the government operates at a deficit, meaning taxes don't cover all their expenses. There are some strong yet counterintuitive econ arguments

for why some debt is healthy for the government. But whether or not you agree with those arguments, rejecting the debt ceiling doesn't change the system. We have to approve the debt ceiling just to keep the government lights on. Now, you may be wondering, what would it mean for me if the debt ceiling isn't passed? Well, it would mean that about a tenth of all daily economic activity would disappear. Just disappear, which, of course, would be devastating. The situation is unlikely to reach that point, but given the difficulty we saw last week with the election of the Speaker of the House, it seems possible that we could reach that point where a shutdown is threatened. When the government actually did

shut down in 2011, there was a massive sell-off in the stock market. And because we're already in a bear market right now, a further downturn could be problematic. This is one of those stories with financial implications for everyone from your grandma on Social Security to your friend from high school who's in the Coast Guard to you and your IRA. We're all going to be sick of hearing about the debt ceiling by next winter, but you're going to need to keep your eyes on this one because it's not going anywhere anytime soon. Here's the second big story, and it's also one you might be sick of hearing about, but it's important to keep tabs on for your financial well-being, your financial future, and all those good financial things.

It's inflation. I wish I could say inflation was so 2022, and I bet the Fed does too. Last year, the Fed built its monetary policy around inflation numbers and hiked rates in an attempt to get inflation down to 2%. Or at least that's how it started. That's not how it's going. By the end of 2022, the Fed was focusing on the jobs market as well as the monthly inflation numbers. Remember, the Fed wants a soft landing here. They want prices to go up slowly without people losing their jobs. In a tight labor market, there is a risk of creating, though, a wage price spiral. It goes like this. When the cost of living gets more expensive, employees demand better pay to pay for said cost of living, and then employers

raise prices to pay for better wages. This creates a spiral that neither side can easily escape from. Last week, we found out how it's really going because we got a look at some jobs numbers. And spoiler alert, it's actually going okay. We have low unemployment without rising wages. So far, it looks like we've avoided this wage price spiral thing. Hopefully, this could mean that the Fed will slow its rate of increasing interest rates. In some ways, this is a mixed story. Wages have not risen at the same rate as inflation. story. Wages have not risen at the same rate as inflation. And when we look back at the last couple of decades, they have not kept up with housing costs in most parts of the country. One study by MIT actually found that a single mother of two earning the federal minimum wage

of $7.25 would need to work 235 hours a week just to cover the average living expenses for her family. Given that there are only 168 hours in a week, she's going to have a really hard time doing that. So some wages need to go up. The trick is having them go up slowly to avoid that wage price spiral and triggering even more inflation. This week, we're going to find out how we're really doing with inflation because a bunch of numbers related to inflation drop on Thursday. They're all variations of the Consumer Price Index broken down in different ways. The Consumer Price Index, or CPI, is compiled based on a, quote, basket of goods. I assume that's supposed to be a shopping basket, but since it

includes housing, transportation, and medical costs, it's a pretty big metaphorical basket. Anyway, the Bureau of Labor Statistics has a 600-page manual that outlines how to collect all the numbers that go into this big old basket. It gives a great long-term look at how prices have moved on simple everyday purchases like bread and milk. The CPI is a big factor in how the Fed has been thinking about rate hikes. So we'll be watching for these numbers when they come out later this week. For today's tip, you can take straight to the bank. Put those blinders on.

In addition to inflation updates and debt ceiling madness, earnings season kicks off this week with banks around the country reporting their earnings for the quarter. Expectations are low. And remember, on Wall Street and in life, it is better to beat low expectations. And last earnings season actually did go better than expected. But if the numbers are worse than the already low expectations, it could be a rough patch for the market. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Our executive producer is Morgan Lavoie. Do you need some money rehab? And let's be honest, we all do. So email us your money questions at moneyrehab at moneynewsnetwork.com to have your question answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. Seriously, thank you for listening and investing in yourself, which is the most important investment you can make.