As many of us are aware, we are not immune to global events. Australia may sit a vast 15,000km from the US, but the things that happen there can still impact our political system, economy and way of life.

It will come as no surprise, then, that the current controversy surrounding the US debt ceiling could influence the Australian economic outlook. You may be wondering what the issue is, in what ways it could potentially impact everyday Australians and what you can personally do to protect yourself and your hard-earned assets.

How Does the US Debt Ceiling Affect the Australian Economy?

To understand how the US debt and debt ceiling can affect the Australian economy we need to first understand what the US debt ceiling is.

What is the US debt ceiling?

Put simply, the US debt ceiling is the limit on the amount of national debt the United States is allowed to accrue by issuing bonds. This ceiling was created under the Second Liberty Bond Act of 1917, but has been raised or suspended over the years.

As happens in most governments around the world, US citizens pay taxes, which are collected by the government to help fund services and keep the economy running smoothly. When the government spends more money than it can collect via taxes, it has to borrow the extra funds – resulting in higher debts. These debts also accrue interest, meaning a larger overall amount that is owed.

As long as they are operating under the debt ceiling, the US Treasury can issue bonds without having to go to Congress for approval. However, once they hit the debt ceiling, they are no longer able to do so. And without some action being taken the United States could default on their loans, which would lower their credit rating and increase the cost of its debt.

Why does this matter?

The US government hit the debt ceiling on 19 January 2023, meaning it officially reached its legally allowed limit. This caused the world to sit up and take notice, even here in Australia.

When there is a crisis in the US economy, it affects the global economy, both directly and indirectly. And reaching the debt ceiling certainly qualifies. In fact, even getting close to a debt ceiling breach causes disruptions in financial markets that could lead to worsening economic situations for individuals and households across the world.

It leads to:

• Reduced consumer and business confidence
• Slowing of the global economy
• Weakened Aussie dollar
• Higher import costs
• Raised global interest rates
• Loss of confidence from Australian retail investors
• Declines in the price of equities
• Contraction of private credit markets

What you can do to protect yourself

When Australia’s economy outlook appears vulnerable, individuals should take extra steps to protect themselves and their assets. You can recession-proof yourself by:

• Assessing your current financial position: Take the time to sit down and work out what state of health you are currently in financially. Could you weather the economic storm, if it were to arrive? This process will help you to identify any financial vulnerabilities so you can figure out how to protect yourself moving forward.
• Re-evaluating your mortgage: If the constant interest rate hikes haven’t already seen you taking a closer look at your home loan, then the debt ceiling issue may be the final push you need. Refinancing your home loan could lead to lower interest rates, more equity, lower fees and consolidated debt. Get in touch with Lending Loop if you need some expert help.
• Pay down your debts: Paying down your debts is always a good idea, but it’s especially important during a difficult economic situation. Take a look at your debts, and prioritise them based on interest rate. Then start paying off the most expensive first. Once you’ve paid one debt off, move to the next debt, paying more each time (as you free up liquidity). This will help you pay them down more quickly saving you money in the long run.
• Focus on your savings: work out your living expenses and then create a budget. As part of your budget include a portion of your income to go to savings each month. Make this a priority and accomplish it by cutting out unnecessary spending wherever you can.

The current situation

Fortunately, a debt ceiling deal has been signed in the US, just in the nick of time. A few days before the US was predicted to run out of cash and default on its debt repayments, US President Joe Biden signed legislation to avoid a potential economic catastrophe. The final agreement was passed by both the House and the Senate, and will see a suspension of the debt limit until 2025, as well as restrictions on government spending.

Navigating Economic Uncertainties

If the US debt ceiling crisis has motivated you to ensure your hard-earned assets are protected, please get in touch with a member of our expert team. 

We’re here to help you navigate the uncertainties. And to make sure you’re in the best position possible to brace the potential economic storm. Give us a call today.