Credello Discusses US Debt Ceiling: What is a Debt Ceiling and How Can It Impact Your Wallet?

Consumers have spending limits on their credit cards. When the balance is zero, the amount up to the limit is called "available credit." The United States Treasury Department has a debt ceiling. It works the same as your credit limit, but with a much higher number attached to it. The debt ceiling determines how much the government can borrow. If the Treasury needs more, they ask for a vote from Congress to raise the debt ceiling.  

Hitting the debt ceiling without Congressional authorization to raise it could have serious consequences. Think of it this way: you're making payments on your credit cards using the debt avalanche method and suddenly having no money to cover your autopayments. You'll go into default and your creditors won't get paid. That can happen at a government level also.  

How the Debt Ceiling Impacts Your Wallet

If the government hits the debt ceiling and is unable to borrow any more money, certain bills are not going to get paid. One of those could be your monthly social security check or veteran's benefit. Those funds have been allocated to you, but the government is running on a deficit. They need to borrow to be able to pay you. The US Treasury can't borrow if they're over the debt ceiling. 

Missed payments like these are the direct effect the debt ceiling has on your wallet. The indirect effect on your wallet is the downgrade of America's credit rating that would occur if this scenario happened. The United States has been a preferred borrower for decades. We've never defaulted on our debts. If we do, borrowing becomes expensive. That trickles down to federally backed banks and consumers.  

The third potential effect of hitting the debt ceiling is the impact on the US dollar. A lowered national credit rating would undermine international confidence in the dollar, which is currently considered one of the most stable currencies in the world. Take that away and this country will lose its status as a preferred trading partner, shifting the global balance of power. 

Congressional Debate and Stock Market Volatility

In recent years, the debt ceiling has been the subject of intense Congressional debate and media attention. Many lawmakers advocate for its elimination, arguing that the United States cannot be constantly on the brink of default. Others view it as an essential check and balance mechanism that keeps the US Treasury from overspending. 

The flaw in that last line of reasoning is that the Treasury department doesn't decide what to spend money on. They can dictate policy and monitor banking regulations, but any expenditures need to be authorized by Congress. Current spending that requires borrowing additional funds was cleared by previous administrations.  

Another danger with the debt ceiling is that each debate when we get close to hitting it causes increased volatility in the stock market. Companies that make up the S&P 500 and Nasdaq are reliant on the stability of the US government to maintain profitability. Credit defaults are bad for business. That's why Congress always raises the debt ceiling when necessary.           

Source: Credello

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Categories: Personal and Family Finances

Tags: Debt, Financial Services, Personal Finance


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