Probably. Obama and Boehner decided to kick the debt ceiling issue down the road until after the election.  The road ends on March 15th when US debt freezes at $20.1 trillion. Congress hasn’t even started debating raising the debt ceiling even though by all estimates Trump’s plans will require more debt.

Why so little talk of the debt ceiling?

Because everyone knows the Treasury can just make the military and federal employee’s Thrift Savings Plan (TSP) G fund disappear from the US debt ledger by simply not paying interest on the fund. If the government is not paying interest on the fund, then it can not be debt – right.  It’s magic.

The money still belongs to the participates and they will still see it on their balance sheets, but via accounting magic the government can move all the funds from the US government debt column to some other made-up account. Nothing will change, except the interest payment stops officially accruing on TSP participate accounts.  In the past, once the debt ceiling has been raised then all the back interest was credited to TSP participate accounts.

What happens if they do not raise the debt ceiling?

Then Trump’s fiscal stimulus plans will become fiscal slamming on the brakes.  Even if they pay for new spending by cutting other part of the budget, there is no stimulus.  Since the braking from cuts happens faster than the stimulus from spending, we could see some fiscal braking in 2017 and 2018.

Fiscal stimulus only works when you borrow money to spend (or just print money).  I do not think the Republicans will shoot themselves in the economic foot. But maybe a flesh wound here and there.  I actually think we will see our debt grow substantially under Trump with the positive effects “planned” to happen in the next Presidential pre-election and election years.

When the same party controls both Congress and the Executive branch, our government tends to spend the most money and run up the largest debts.  It does not matter whether it is Democrats or Republicans other than determining what the money is spent on. So it would be surprising if the debt ceiling is not raised or eliminated all together.

What about the interest on the TSP G fund?

Could the government default and not pay the back interest or stop paying interest all together? Yes. Some Congressmen think it is too good of a deal. And this Congress may be the one to make changes.  Although, if they do not put the TSP G fund back under the US debt column again, they will not have that automatic get-out-of-jail card the next time we bump up on the debt ceiling.

Currently, it is estimated that removing the TSP G fund balance from the US government debt column will buy the government until sometime in September to make any real hard decisions. So I expect a fight over the debt to commence this summer in earnest.  And that will weigh on the markets and all the positive sentiment.  In other words, it will be a good time to be sitting on the sidelines.

What does the TSP G fund invest in?

The TSP G fund does not invest in real securities – that would be too complicated and disruptive to the market.   It is a virtual account that calculates the interest rate earned by a formula that averages all long-term treasury interest rates. Since no actual securities are traded, there are no capital gains and losses as interest rates change.  The interest paid is designed to keep up with inflation.  The funds only major risk is political at this time.

The “virtual” social security fund earns interest the same way the TSP G fund does.  Both funds are all on-paper accounting.  The Treasury could stop paying interest on the Social Security surplus fund and not count it toward the US government debt too.  But that would confuse all Americans just like they currently confuse TSP participates each time we have a self-induced debt ceiling crisis, so I don’t think they will touch that gimmick.

So should you move your funds out of the TSP G fund before 15 March?

No!  Your money is still in your account and still yours, it just will not earn interest until the debt ceiling is raised.  And then you will probably receive back-interest.  The TSP G fund remains the only no-risk fund (excluding political risk). It will just not be able to keep up with inflation if it stops paying interest.

I have heard many people state that if you are *not* invested in stock market, you are losing ground. Hopefully the chart above conveys that sometimes the TSP G fund or even cash significantly outperforms stocks.

I expect the relative performance of the TSP G fund over the next 12 years will beat the SP500 index as it did in 2000.  I also bet there will be a lower risk time to jump with both feet back into equities. We currently have one foot in equities and one foot out.  Watching intently.

It is TSP Smart Investor’s opinion we are in a market melt-up based on excessive global monetary injections over the last year and excessive retail investor expectations post-election. As investors fade the rally, the TSP G fund will guarantee return of capital even if return on capital is low. In other words, the TSP G fund outperforms when the equity funds are giving back all or most of their bull market gains.

Categories: Perspectives, The Smart Bird, TSP Charts