As an American it’s disheartening to see the political gridlock continue without a solution as the August 2nd deadline looms less than two days away. While negotiations continue, the fact remains — if the debt ceiling is not raised by August 2nd, there is a high probability the U.S. will default on its financial obligations for the first time in American history. That means we are just a few short days away from this important financial decision, which could jeopardize the country’s AAA credit rating, payments for the military, social security and more.
Despite all of the debating, there’s still a bit of confusion about what it means to raise the debt ceiling. In short, raising the debt ceiling gives the U.S. government the ability to pay the bills it has already incurred. For a simple example, if we chose not to raise the debt limit it would be like running up your electric bill and refusing to pay the bill.
The purpose of this post is not to be political, but to explain the facts around the debt ceiling debate. Suze Orman wrote a great piece on this yesterday, Congress’ mishandling of debt ceiling and deficit is surreal.
An excerpt from Suze Orman’s article:
As we all know, if you run up a balance on your credit card and then decide not to pay the bill, there’s a huge price to pay. Your interest rate goes up, your credit score goes down and that triggers all sorts of costly dominoes to start falling. To not raise the debt ceiling is akin to refusing to pay your credit card bill.
The debt ceiling has nothing to do with future spending. It’s simply a mechanism that allows the U.S. government to keep paying off the bills it has already run up. This is a completely separate issue from what we decide is the right pace of future spending for our country. The deficit reduction debate is about that future path. That anyone insists on linking the two is absurd. We must make good on paying off our bills.
Besides defaulting on our debt has a ripple effect beyond the AAA credit rating:
- Anxiety in Afghanistan over troops pay if U.S. defaults
- Default on debt or downgrade, consumers face consequences
- What the Government Debt Crisis Means to You
My Take:
We have a responsibility as a country to pay the bills and raising the debt ceiling allows us to keep those commitments. After all, if you want to get your financial house in order, the answer is not to stop paying the bills you’ve already racked up, but to layout a strategy to get it done. Regardless of our political opinions, I think we can all agree that the deficit did not happen overnight and there will have to be a structured and well thought out approach to help reduce it.
I hope our politicians work together to do what’s best for the country.
What’s your take on the debt ceiling?
Photo by Andrew Bossi, Flickr
Ok sounds logical but where does this money come from to raise the debt ceiling?
Hi James,
Thanks for your comment! I apologize for the late reply. If the Treasury does not have enough money to pay the government’s bills, it borrows the money. However, if there is a debt ceiling and not enough money coming in to cover these expenditures the government could default on some of its obligations. So essentially, raising the debt ceiling allows the Treasury to borrow more money to cover the expenses when there is not enough revenue to cover them. For more on this, please check out – https://www.brookings.edu/blog/up-front/2017/08/03/the-hutchins-center-explains-the-debt-limit/
It almost sounds like begging for more credit when you already owe money. Honestly this country needs to get it together. They need to reevaluate their priorities.