The stand-off between the White House and Congress about the amount of debt the U.S. owes and how it will be paid off is a current hot topic in the news. If you are getting a sense of déjà vu, you aren’t alone. We’ve attended this financial circus before.
The debt limit, sometimes called the debt ceiling, is something that has been revised and revisited numerous times in the last century, usually making news headlines. We take a closer look at just what this limit is, what a government shutdown could mean, and how all this can potentially affect you.
Debt Ceiling
What exactly is a debt ceiling? The U.S. has certain financial obligations that it must pay. The debt ceiling is what the government can borrow to pay those obligations.
The U.S. government has had some debt ever since the nation’s founding and Revolutionary War. The amount of money owed has been in constant flux, but starting in the 20th century, that debt load has been on a continuous upward climb.
Prior to 1917, the concept of a debt ceiling did not exist. There were some limitations on the amount of debt the government could take on, but a legal limit was not in place. When America joined the Allied cause in World War I, funds were needed and raised through the sale of liberty bonds.
The Second Liberty Bond Act allowed the government to issue these bonds and to borrow additional money without Congressional oversight up to a specified debt limit. This debt ceiling eventually expanded to include all federal debt.
Throughout the decades, the debt limit was raised in conjunction with a new federal budget. For example, between the years 1962 and 2011, the debt ceiling was bumped up 74 times. It has not been reduced once.
This year is not the first time there has been a crisis surrounding the debt limit. There have been similar predicaments in 1995, 2011, 2013, and 2021.
Some people have labeled the debate surrounding the debt ceiling and its existence a farce. They look upon the situation as a result of partisan politics and a lack of fiscal responsibility on the government’s part. It is easy to think that the debt limit is a question of “Can we spend more?” but the question is really “How are we going to pay for what we have already spent?”
Many financial experts are questioning the debt ceiling's usefulness today. While it was once a fiscal measure to contain government spending, it seems to have morphed into a political negotiating tool for each party. Debt limits are no longer a fiscal policy for accountability.
So, why should you care? Does this really affect you personally? It can.
How It Affects You
The U.S. is a world leader in the financial world. The nation has never defaulted on the money that it owes. Because of this, the U.S. dollar is a major player in the global financial market and monetary security.
The main concern with the debt ceiling crisis is that it puts our nation at risk of defaulting on its loans. This could kick off a domino effect around the world in financial markets as well as trigger a global recession.
What particular areas of our everyday lives would a default affect?
● Benefits withheld: Social Security payments could be withheld or decreased, along with Medicare and Medicaid. Federal tax refunds? Forget about it. If you receive any kind of monthly stipend or monetary benefit from the federal government, you would be at risk of not receiving them or having them lowered. Food stamps, housing assistance, and welfare would all be reduced.
● Government shutdown: There have been government shutdowns in the past, including in the years 1980, 1981, 1984, 1986, 1990, 1995-96, 2013, and 2018. Only the essential federal agencies would remain open, with the rest being temporarily closed or having their working hours reduced. This means that you may not be able to access the type of services that these agencies provide.
● Government workers are not paid: Critical personnel such as active duty military, air traffic controllers, and federal law enforcement are still employed and working but may have their salary reduced or temporarily halted. Federal employees could be put on furlough and left unpaid. Government contractors would also not be paid. If you work for the federal government or provide them with goods and services, this could affect your ability to make a living.
● Increase in interest rates: This means auto loans, credit cards, and mortgages would all be subject to higher interest rates. It becomes more expensive to borrow money. Your ability to purchase a vehicle or home could be more difficult due to loans being more expensive. And if you owe money on a credit card, your debt load will become harder to pay off.
● National sites shut down: Because they are funded by the federal government, national monuments, museums, parks, and zoos would be closed or have their hours and staff severely reduced. If you are planning on including any of these national sites in your vacation, you may be disappointed with their closure or limited hours.
● Unemployment would rise: Because of shutdowns in federal and related sectors, job losses could occur. And coupled with a weakening of the economy, millions of people would be affected by layoffs and furloughs.
In Summary
The debt ceiling crisis is nothing new, but there are concerns that a potential default could upset the national and global economies. Being aware of how it can affect you financially will help you to take the needed steps to protect yourself and your family from potential consequences.