Recently, every Sunday, Janet Yellen has been on a morning show talking about the debt ceiling. She’s even making rounds with different corporate executives. And every financial newsletter has a section about this big topic. So, what’s going on? And how worried should we really be? In this blog post, we’ll explain the debt ceiling and share our thoughts on how worried the average American citizen should be right now.
What is the Debt Ceiling?
The debt ceiling is the maximum amount of money the government can borrow. This legislative cap is set by the American government (current cap is $31.4 trillion) – one of the very few governments few in the world that has this cap. In other words, it represents the maximum amount of money the US federal government can borrow (from itself) to meet its financial obligations, such as paying bills, providing services, and honoring existing commitments (like paying interest to US Treasury bond/bill/note holders).
The US has never defaulted on its debt before, so there is no precedent to guide what exactly would happen in a debt ceiling crisis.
Why is the Debt Ceiling Important?
- Ensure Financial Stability: The debt ceiling prevents excessive borrowing and maintains the nation’s financial stability. By imposing a limit on the amount of debt the government can accumulate, it promotes fiscal discipline and discourages unchecked spending.
- Congressional Oversight: Setting a debt ceiling requires Congress to review and authorize the government’s borrowing capacity. This process allows – and requires – elected representatives to exercise oversight (and agreement) over the country’s fiscal decisions.
- Confidence in Financial Markets: The debt ceiling plays a crucial role in maintaining confidence in the U.S. economy and financial markets. It provides assurance to investors and creditors that the government is committed to responsible borrowing practices, thus minimizing the risk of a financial crisis and ensuring the stability of interest rates.
Should we be worried about hitting the Debt Ceiling and the June 1st deadline?
- Economic Impact: Failure to raise the debt ceiling – which has been a very close, sometimes 2-day call in the last few administrations – can have severe consequences for the economy. It may lead to a government shutdown, delayed payments to individuals and businesses, reduced government services, and increased borrowing costs. These effects can have an impact throughout the economy, potentially leading to job losses, decreased consumer spending, and overall economic instability.
- Social Programs and Services: In the event of a breach of the debt ceiling, the government may fall short in meeting its obligations, including funding for essential social programs such as Social Security, Medicare, and Medicaid.
- Market Volatility: The uncertainty surrounding the debt ceiling debate can trigger market volatility, affecting investments, retirement savings, and the overall financial well-being of individuals. These fluctuations are typically very temporary, but can cause some anxiety in the stock markets.
While the debt ceiling is a matter of significant governmental concern (and negotiation between political parties), it is important to remember most of us have limited control over its resolution. The US has always raised the debt ceiling in past crises, usually at the very last minute. Most expect that to happen again as the impact and repercussions of NOT raising the debt ceiling would cause a global economic crisis.
See Part 2 next week ‘How the Debt Ceiling could impact YOU and what you can do to prepare’