National debt ceiling debate affects us all

Monday, June 6th, 2011 By

Nationald debt clock

The national debt soars. This clock is a little slow. Image: Raphiq Phillips/Flickr/CC BY-SA

The U.S. will soon hit the $14.294 trillion debt ceiling, prompting Congress to vote on again raising the limit. But Congressional Republicans have threatened opposition if the vote does not include budget cuts and long-term debt reduction. If an agreement is not reached by August, it will be an unprecedented situation that will be felt by all consumers.

The limit the U.S. can borrow

The debt ceiling is the maximum limit the government is allowed to borrow to pay its current debts. In the past, Congress has always voted to raise the limit.

If the issue is not settled by August, military employees and dependents may see severe income losses. Those dependent on Social Security may be left out in the cold. The loss of Medicare could drive healthcare expenses to levels beyond the reach of most people. Interest and credit rates could drastically increase, as well as taxes.

Taxes pay only 60 percent

“Given that the government currently only raises taxes to cover 60 percent of what it spends, being able to borrow means that the services people depend on from the government continue,” explains Stan Collender, a partner at Qorvis Communications. If Congress fails to vote for a limit increase, it could lead to much higher taxes, a reduction of expected services or both.

T-bills considered secure, for now

The U.S. government raises money by selling Treasury Bonds, or T-bills, which promise a small return on the money borrowed. As long as the purchasers are confident that the loans are safe, they are willing to trade security for small returns. However, if national loans are defaulted on, the global marketplace will lose faith in the dollar, causing foreign goods to become more expensive. The marketplace would reflect that lack of confidence by an immediate increase in cost of fuel, electronics and many other items dependent on overseas suppliers.

Jobs could be at stake

Jobs could be at stake not only for those on the government payroll, but for those in the private sector as
well. “We don’t know what will happen because this hasn’t happened before,” says Collender. “But if the debt ceiling isn’t raised and the government runs out of cash, at some point the president may decide he has to stop doing certain things, like paying government contractors, for example. That may not sound like such a big deal, but it is if someone in your family, or someone you know, is working for that contractor, or for the supplier of that contractor, or if that contractor is a big employer in your neighborhood or your state.”

Wall Street remains confident

At this point, the market seems to be ignoring the debt ceiling debate, confident that a solution will be reached. Banks are still lending money, interest rates remain low and the stock market is relatively stable.

Sources

Daily Finance
CBS
Huffington Post

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