The U.S. debt ceiling is all over the news these days. If you’re not into politics, you’ve probably ignored most of the talk. Here’s the gist of what’s going on: The U.S. has a debt ceiling that’s set by Congress. Just like the credit limits on your credit card, the debt ceiling is the amount of money the U.S. is allowed to borrow. The debt ceiling allows the government to pay certain obligations like Social Security, Medicare, national debt interest, tax refunds, and military salaries.
The debt ceiling is currently $16.7 trillion (versus $5.95 trillion in 2000) and the budget deficit is very close to that number ($16.9 trillion as this is being written on October 7, 2013). If Congress doesn’t agree to raise the debt ceiling, the government would default on its legal obligations. That's never happened in the history of the United States, although the nation came close in 2011. That year, there was a threat of debt default when Congress was also deadlocked on raising the debt ceiling. The discussions lasted so long, the nation's credit score was lowered, for the first time ever.
One side of the debate says to just raise the debt ceiling - it's an arbitrary number anyway. The other side says the debt ceiling shouldn't be raised or at least it shouldn't be raised without having an equal amount of money reduced from the national budget.
These debt discussions may seem very Washington D.C. and so far away from your everyday life, but believe it or not, this affects you.
Loss of Federal Benefits
The government doesn't have enough daily revenue to cover all its payments. If it can't borrow more money, Federal benefits could be reduced, delayed, or even cut. If you receive Social Security, Medicare, or military salary your benefits may be reduced or delayed. If you’re due a tax refund, you may not receive it until the debt ceiling crisis is resolved. You can imagine the financial hardship you’d experience if you didn’t receive all or part of your monthly income.
People who receive Medicare may not be able to receive the health care they need. And health care prices for everyone could increase if hospitals don’t receive Medicare payments from services they've already been performed.
Higher Cost of Borrowing
Most credit cards these days have variable interest rates that are tied, at least indirectly, to the U.S. Treasury bond rate, which could increase if the government can’t afford to pay its debt. It's sort of the way credit card issuers raise your interest rate if you fall behind on your credit card payments.
If Treasury bond rates increase, you can expect your variable interest rate to increase shortly after. Mortgage payments could also increase on adjustable rate mortgages that reset around this time.
Interest rates on new loans will also be higher, even for those who have pristine credit history. There’s even speculation that credit and loans will be unavailable until the debt ceiling is raised. That means no student loans, car loans, mortgages, or credit cards.
Prices on Imported Goods Could Increase
The value of the dollar could decline, making imported goods more expensive. That means you spend more money buying household good and you have less money for your other bills and debt payments. Even vacations to other countries will end up more expensive if the dollar declines.
Decline in Investment Value
The value of your stocks, mutual funds, and retirement funds like 401(k) could drop substantially. That means you’ll have to delay retirement. Or, if you’re already in retirement, you’ll have to find a way to make up the missing funds or reduce your spending.
If you think government decisions won’t affect your portfolio, think again. When the House first voted down Bush’s $700 billion bailout proposal in September 2008, the stock market dropped 7% and more than $1 trillion was lost in the stock market that day. World markets struggled for weeks afterward.
According to a report from the U.S. Treasury (PDF), household wealth fell $2.4 trillion in the second and third quarters of 2011, after the debt ceiling impasse of that year. A similar (or worse) thing could happen if the debt ceiling isn't raised. Already, stock indexes are beginning to drop as investors lose confidence in the market.
The loss of funding has the potential to impact the unemployment rate; many Americans could lose their jobs. If corporations lose assets because of the increased interest rates and loss of value in the dollar, they may stop hiring new employees and could even lay off current employees. Small businesses will be even less able to hire employees with the increased cost of borrowing. (Small business owners see: How the U.S. Default Would Affect Small Businesses)
Will It Really Happen?
These are all predictions. Since Congress has never failed to raise the debt ceiling, we don’t know precisely what would happen. However, the U.S. Treasury warns that it could be worse than the financial crisis of 2008 and perhaps worse than the Great Depression. Many Republican representatives, however, do not believe the nation's economy would collapse if the debt ceiling isn't raised or a workable budget isn't put in place. Is it a gamble worth taking?