Dr. Doom Says Debt Ceiling Debate Could Reach 'Last Hour'

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What happened

Nouriel Roubini, also known as Dr. Doom, told Bloomberg that the discussions on raising the debt ceiling may go right down to the wire. Speaking at the Qatar Economic Forum on Wednesday, Roubini warned, "They may get to the last hour before there's an agreement, or it's possible they don't reach an agreement." If no deal is reached, he said it would cause the market to crash.

So what

The debt ceiling is the amount of money the U.S. is able to borrow, a bit like the limit on your credit card. America relies on debt to meet its obligations, and Treasury Secretary Janet Yellen has told politicians they need to increase that limit soon. If lawmakers can't reach a consensus and raise the debt ceiling, she says the U.S. could find itself unable to pay its bills as early as June 1. This includes paying Social Security checks, federal salaries, and interest on Treasury bonds.

It is extremely unlikely that the U.S. will default on its debt. It has never happened before. But until a deal gets done, it is still a possibility, no matter how slight. If it does, fallout in the stock market would not be the only impact. According to White House analysis, a protracted default could wipe out millions of jobs, push interest rates even higher, and make it harder to borrow money.

Now what

Whether it's a potential recession, continued inflation, or the debt ceiling, you could be forgiven for thinking that financial news has been filled with warnings of financial doom in recent years. Unfortunately, we are living through times of economic uncertainty and the debt limit debate only adds to the turbulence.

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The real question is how we can prepare for an economic catastrophe. It's not like we can build a nuclear bunker in our bank accounts. There are no easy answers, but if you're able to pay down debt, do so. Debt could get more expensive in the event of a default and the monthly payments will eat into your budget.

Another worthwhile step? The more cash you have in an easily accessible savings account, the better. An emergency fund can shelter you from job loss, delayed paychecks or Social Security payments, and reduce the risk of being forced to sell other assets in a downturn. There isn't a lot of time, but it may be worth holding off on big purchases in the near term.

In terms of investments, try not to make panic decisions. Not only is it almost impossible to time the market, long-term investors can take some solace from the knowledge that even if the stock market does fall, historically prices have always recovered eventually. If you have a diversified portfolio, don't abandon your wider strategy because of the debt ceiling debate. The politicians may want to use the ceiling to push their own agendas, but none of them want to crash the economy.

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