While the Talking Heads on television debate the chances of the US raising the debt ceiling above its current $ 28.4 trillion ceiling, many are, including Treasury Secretary Janet Yellen and JP Morgan Chase
Chairman and CEO Jamie Dimon, predict economic disaster if Congress does not act. So what should an investor do? If history is a guide, we needn’t worry – Congress has raised or suspended the debt ceiling about 80 times since 1960 – but if the last year and a half has taught us anything, it is that we should expect the unexpected. However, the likelihood that the US will fail to pay its debts is quite small (albeit unfortunately not zero). Current politicians likely learned their lesson during the 2011 debt crisis, when the S&P downgraded the US credit rating and the Dow fell 5.6% for the day. The high-ranking politicians then – Pelosi, Biden, Schumer and McConnell – were the same as those in charge today. Even if they near the brink of insolvency, we expect them to pull back.

For those curious about what the debt ceiling actually is, here’s a little background. The debt ceiling was introduced in 1917 to allow the government to borrow money to pay for World War I, but it didn’t become a political issue system until the 1953 Senate dispute over funding the construction of the U.S. highway.

Secretary of State Yellen is asking Congress to raise the debt ceiling immediately, warning that if Congress does not act, the Treasury Department will run out of money around October 18. (The CBO sees a little more runway, says late October or early November.) In a comment for that Wall Street JournalYellen writes that if the debt ceiling is not raised, nearly 50 million seniors will no longer receive their social security checks, US troops will remain unpaid, and the US will emerge as a permanently weakened nation. It warns of equally devastating financial consequences: the country is plunging into recession and millions of jobs are being lost, with the likely rise in interest rates affecting almost any citizen looking to buy something traditionally borrowed (houses, cars, etc.).

Failure to raise the debt ceiling (especially in the midst of a global pandemic during a fragile economic recovery) would be the financial equivalent of detonating a nuclear bomb and would destroy the US reputation for creditworthiness while undermining the dollar’s position as a world reserve currency. Contrary to some opinions, this would not reduce government spending: 97% of the debt due is accounted for by expenditures incurred under previous administrations.

So what should an investor do? We think it is extremely unlikely that Congress will cause economic disaster by refusing to raise the debt ceiling – the stakes are simply too high not to act. Even so, the probability of failure is not zero. Could the stock market correct substantially if the government defaults? In any case – and with markets near all-time highs, now might be a good time to review your equity market exposure. If a temporary 20% to 30% decline in your portfolio is too much for you, reducing your equity exposure, regardless of the political climate, could give you the opportunity to make rational decisions while surviving a market swoon. The most important thing is not to panic and sell everything when the government goes bankrupt and the markets go into freefall. In March 2020, when the coronavirus raged and stocks collapsed, selling stocks was the worst move an investor could have taken. (See our Forbes March 2020 article for our playbook on what we think investors should do.) The apparent crisis turned into a one-time buying opportunity with many high quality companies more than doubling their panic lows from March 2020. The best thing investors can do is hold some cash on the sidelines and position themselves to take advantage of any market turmoil.