Don't make matters worse if Washington's debt crisis slams your savings

Panic button

Our retirement funds and other investments are probably going to take another beating if the federal government runs out of money this week.

It seems like we just nursed our nest eggs back to health from the last economic crisis inspired by the banking industry’s reckless and irresponsible lending.

Now our financial futures are in jeopardy again, this time thanks to the reckless and irresponsible actions of Washington.

How we reached this point is fairly simple.

The federal government has borrowed almost as much money as Congress has allowed -- $14.3 trillion.

But Republicans in Congress won’t allow the debt limit to be raised unless Democrats agree to deeper cuts in federal spending than they’ve been willing to accept – and with no tax increases to help balance the budget.

The Bipartisan Policy Center estimates that the government will collect $172.4 billion in revenues during August to cover an estimated $306.7 billion in expenses.

If the Treasury Department can’t borrow more money to make up the difference, it won’t be able to pay all of the government’s bills.

No one knows what would – or would not – get paid if no compromise is reached and the Treasury runs out of money.

Social Security yes, but the military no?

Interest on the debt yes, but hospital bills for Medicare no?

That makes it impossible to foresee how much havoc a deadbeat government could wreak on our personal investments – everything from corporate stocks and bonds to Treasury bills and bank accounts.

About the only thing financial advisers can agree on with some certainty is that you’ve got to resist the temptation to panic and run.

Don’t liquidate your stocks. Don’t sell off all your Treasury bonds. Don’t pull your money out of the banks.

Yes, there’s going to be a lot of volatility in almost every corner of the financial world.

But this is such an unprecedented situation that it’s impossible to know where to find such sanctuary for your nest egg.

Just remember the lesson we all learned from the financial crisis of 2008 – the savers who came out the best were those who stood firm in the face of a catastrophic banking industry crisis.

If you're 30 or 40 years old, you won't need your retirement funds for at least another 20 or 30 years. By then this will be a tiny dot in your rearview mirror.

Let's say the stock in your 401(k) plan was worth $30,000 before all of this started and the markets’ headed south.

The worst happens this week, politics trumps common sense and no deal is reached to raise the debt ceiling, you panic and sell when your retirement fund is only worth $25,000.

The crisis comes. The crisis goes. The markets right themselves and return to where they were before the brouhaha began.

Now you’re ready to buy those equities back, but you must pay a much higher price than you sold them for. You’ve essentially locked in a $5,000 loss.

You may also have lost out on dividends and racked up expenses in trading costs.

The same goes for your savings bonds and Treasury bills.

Washington owes about $29 billion in interest on the federal debt in August.

If it delays any of those payments, then it will be in default.

That is so unthinkable that most experts think the Obama administration will make those payments a top priority.

Standard & Poor's will probably reduce its AAA rating for federal debt even if Washington doesn’t default.

That reflects a perfectly understandable opinion that this kind of irresponsible politics makes holding our debt a bigger risk – period.

But Moody’s and Fitch, the other two big credit rating agencies, say they won’t downgrade Treasury bonds unless there’s an actual default. And that’s important.

Trillions of dollars worth of Treasuries are held by money market funds and institutional investors whose rules require them to hold top-rated AAA securities.

But they usually aren’t required to divest a holding unless it’s downgraded by at least two of the three credit rating agencies.

As long as Moody's and Fitch hold the line, money market funds and institutional investors won’t have to dump their Treasuries, avoiding a monumental selloff that could easily trigger another 2008-like economic meltdown.

That’s the kind of uncertainty that makes it tough to divine a safer place to put your money than the stocks, bonds or bank deposits where you have it right now.

We’ve seen many different ideas for where to find a safe haven from this crisis, including such traditional hedges as Swiss francs and gold.

But life boats like that are already full to the gunwales.

Gold prices are hitting new highs every day and have surged more than 200% since September 2008. There could be more upside but it could also have reached its peak.

Want to take a chance anyway? Fine, then put a few bucks into gold ETF and maybe you'll earn a few percent.

Just don't dump your whole portfolio into gold thinking it’s the only refuge should financial Armageddon take place.

Some analysts believe that the downgrade could actually negatively impact commodities, which would send the price of gold down.

And don't even think about buying the real thing and stashing some gold bars under your bed.

The transaction costs alone with rob you of half your profits and your lack of experience in gold means there's a good chance you'll be taken for a ride too.

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