The federal government is in partial shutdown mode due to disagreement on a spending plan. National parks are closed. About 800,000 government workers have been sent home without pay.
It can’t get worse than that, right?
Wrong. In mid-month, something might happen that would make the shutdown look like child’s play. What if Congress can’t agree to raise the debt ceiling — which enables the federal government to borrow money to pay the bills it has already incurred? Comparing the current budget squabble to a debt ceiling impasse is like comparing a bounced check with a bankruptcy. Failure to raise the debt ceiling will directly affect you, along with millions more throughout the world.
In the following video, founder Stacy Johnson interviews Dr. Albert Williams, an associate professor of economics with Nova Southeastern University and friend of Money Talks News. He explains in simple terms what the debt ceiling is and why it’s so important. Check it out, then read on for more.
Now, here are nine things about the debt ceiling every American should know:
1. What the debt ceiling is
When you spend more than you make, your only option to pay the bills is borrowing money. Uncle Sam has been doing it, off and on, since we got together and formed a country.
But like any of us, there’s a cap to Uncle Sam’s credit line, a ceiling on the amount he can borrow. And that ceiling can’t be increased without permission from Congress. Sometimes the granting of that permission slips by unnoticed; other times (like now and in 2011) it becomes a pivotal point for partisan politics.
2. What the debt ceiling isn’t
The debt ceiling has nothing to do with more government spending. It gives the government the ability to borrow money to pay the bills it already has.
Think of it as you would your car payment. If you borrow to buy a $25,000 car, you’ve already spent the money. If you don’t have the cash to make the payments, your only option, other than defaulting on the loan, is to borrow more.
3. How much the U.S. owes
Right now the U.S. debt is $16.9 trillion and climbing.
4. How the idea of the debt ceiling came about
The idea for requiring congressional approval prior to raising the amount the government can borrow came about in 1917, as the U.S. entered World War I. That’s when Congress agreed to give the government the flexibility to borrow money when necessary, up to a certain limit. Before then, Congress had to vote every time the government needed to borrow money.
In theory, forcing the president to obtain congressional approval to borrow should provide checks and balances that would prohibit our nation’s debt from becoming a problem. Many would argue, however, that it hasn’t worked.
5. How often this is an issue
According to the U.S. Department of the Treasury, “Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.”
6. What will happen if Congress doesn’t raise the debt ceiling in time
If Congress doesn’t raise the debt ceiling by the day it’s reached in mid-October, a few days probably won’t matter. But ultimately the U.S. Treasury won’t be able to borrow the money it needs to pay all of the country’s bills when they’re due.
The government will be forced to do what you’d be forced to do in a similar situation: decide which bills to pay and which to delay. Not a pretty picture.
7. The worst that can happen
If you depend on borrowing to pay the bills, your inability to borrow more will result in some bills going unpaid. This will not only upset creditors who get stiffed, it will also make your remaining creditors nervous, because they could be next.
Result? Those not getting paid will refuse to deal with you and those still getting paid will demand higher interest rates because you’re now much riskier to deal with.
If the U.S. misses payments on its existing debt or can’t pay its other bills, those not getting paid will be upset, and those still getting paid will demand much higher interest for assuming much greater risk.
In short, in the same way a bank will raise your credit card rate if you miss a payment, interest rates on U.S. Treasury bills, notes and bonds will immediately and radically increase.
Rising interest rates on our debt not only costs us more money, it also costs something way more important — reputation. Without confidence in our economy, investors worldwide will avoid our stock and bond markets like the plague. The dollar will decline in value, which means higher prices for imports, like oil. Securities markets will crash, interest rates will rise across the board, and a worldwide recession rivaling the one we’re still recovering from — if not worse – will almost certainly ensue.
8. What has happened in the past
Congress has never refused to raise the debt ceiling. There have been times when it looked dicey – including in 2011, when the U.S. credit rating fell from AAA to AA – as a result. But thus far, cooler heads have always prevailed.
9. What you can do
There are lots of things in politics that are more show than substance. This isn’t one of them.
As should be clear by now, using the debt ceiling as a bargaining chip is playing Russian roulette with the world’s largest and most successful economy.
That doesn’t mean there should never be negotiations about the debt ceiling. The reason we have a debt ceiling is so Congress and the president will be forced to confront the fact they’re spending more than they’re taking in. And that makes approaching the debt ceiling a good time to talk about what can be done to lower our nation’s debt and deficit spending.
But nobody – especially a minority of congressmen, whether left or right – should dare to take our national well-being hostage simply to advance a partisan political agenda.
There’s a big difference between saying “Before we raise the debt ceiling, let’s agree on a plan to reduce the deficit,” and “If you don’t agree to effectively repeal a law passed by a majority in Congress three years ago, we’ll ruin the world’s economy.”
Stacy Johnson contributed to this report.
Sign up for our free newsletter
Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's '205 Ways to Save Money' as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash. It doesn't cost a dime, so why wait? Click here to sign up now.