Eric Reed

Many economists agree that a federal default would be catastrophic. If Congress refuses to raise the debt ceiling, which House Republicans have threatened to do unless President Joe Biden's administration grants them certain policy concessions, the economic damage could be swift and severe. Moody's Chief Economist Mark Zandi has testified, for example, that default could include a deep recession and up to 7 million jobs lost.

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At the same time, federal payments would begin stuttering to a halt. Depending on how long a default continued, the Treasury Department could miss interest and debt service while federal paychecks, benefits and other payments would be at risk. While the debt ceiling debate has historically played like high political theater, the combined one-two punch of soaring unemployment and missed federal payments would have a very real impact on households. So, for individuals and financial advisors, the question is: what next?

To understand how advisors should be addressing clients' default concerns, SmartAsset reached out to Atul Bhatia, fixed-income portfolio strategist with RBC Wealth Management. And his main advice is simple: Don't panic.

The U.S. Debt Default
In January, government spending hit the federal debt ceiling. This is a World
War I-era procedural rule by which Congress sets a limit on how much the
Treasury can borrow at any one time. If the national debt reaches this limit,
Congress must specifically raise it before the Treasury can continue borrowing
money to pay its bills.

The problem with the debt ceiling is that, despite its name, it has no relationship with how much money the government owes. The Treasury issues debt to raise money with which it pays existing bills and creditors, spending that is established through past budgets and borrowing.

If Congress refuses to raise the debt ceiling, the government will still owe this money to assorted bondholders, contractors, federal employees, Social Security recipients and countless others. But it will not have the cash to make those payments and will, instead, begin to default on those bills.

Why Clients - and Advisors - Shouldn't Panic
''Our take is that they're not going to default. And if they're not going to
default, this just becomes (about) how high is the volume going to become on the
noise,'' Bhatia says.

''The message we're sending is: The U.S. is not going to default. We don't see that as an on-the-table option.''

That doesn't mean that the debt ceiling conflict means nothing. There is a very real cost when a borrower, any borrower, talks about not paying their bills. The more often, and more loudly, an institution threatens to default, the more nervous it will make future lenders. All of this is relevant, but it doesn't mean financial advisors should prepare for stopped payments and missed paychecks.

Instead, there are two major concerns when it comes to the federal debt ceiling. The first is how this would affect individuals through a recession, unemployment and missed payments. Second, how it would change an investor's perspective on U. S. debt. In both cases, Bhatia's team has taken the same position. Individuals do not need to begin taking extraordinary measures in anticipation of job loss, no more than they should for ordinary financial planning. And investors don't need to begin planning around a collapse of Treasury debt.

Advisors Should Remain Consistent on Portfolio Construction ''The question becomes ultimately, do you flee the asset class?'' Bhatia says.