The Amateur Financier

It’s official; as of Monday, the United States has hit its debt ceiling, the self-imposed limit to the level of debt that the Treasury can take on in order to fund the function of the federal government.  Yes, we have hit the current debt limit of $14.3 Trillion (an amount so large that I honestly have no ready comparisons to help put it into context), and without a law passed by Congress allowing the Treasury to borrow even more, there’s a risk of serious trouble with national finances.

To help try to sort through this (potentially) monumental event (and help to get my own thoughts in order), I thought I would go through some of the most common questions about this deficit problem, and try to answer them for my readers (and for myself).

Q: Just What Is The Debt Ceiling?

The debt ceiling is, as mentioned, the limit on the amount of debt that the Treasury Department can take on in order to fund all the spending obligations approved by Congress and the President.  As the Government Accountability Office (GAO) notes, it doesn’t stop Congress from passing legislation that increases the level of spending (or cuts the amount of tax income), nor does it keep the President from signing such legislation into law.  All it really does is determines what the Treasury is able to do in order to fund the laws that Congress enacts.

There’s no perfect parallel to your household finances (unlike the federal government, you lack the power to tax or the ability to sell IOUs to the international market at low rates).  The closest comparison I can make is maxing out your credit cards; the credit card company will no longer let you borrow money at that point, so you’re forced to find alternatives to pay what you owe.

Q: So, Does This Mean The Government Will Stop Functioning?

Short answer, No.  Longer answer: This does mean that the options that the Treasury has to finance government services is more limited, but don’t expect that the Army will bring everyone home, nor will the FBI will close up shop, Social Security checks won’t stop coming, etc.  Much as hitting your credit limit doesn’t eliminate all your money management options, there are a few possibilities that the Treasury Department has to keep the government’s doors open, including the following:

Source: The Wall Street Journal

So, good news: regardless of whether Congress and the President can come to an agreeement on the debt ceiling immediately, there is a little leeway before we run into serious trouble.  The bad news is that there’s already a date when we are expected to run into serious trouble: August 2nd, when the Treasury runs out of options for alternative sources of funds.

Q: How Do We Deal With The Debt Ceiling?

A: The easiest way is simply to raise the debt ceiling and enable more borrowing.  Similar to getting an increase in your line of credit (but potentially even easier, as Congress can simply agree to give themselves more borrowing authority), increasing the debt ceiling would enable more borrowing in order to fund the programs that Congress has already authorized.  There are arguments, particularly by Republicans, that such increases should only be granted if accompanied by significant spending cuts.  Without getting too much into the politics of the whole situation (which I might do later if and when the lines drawn in the sand become clearer), there’s a good chance this will not occur without significant political battles.

Q: What Happens If We Don’t Raise The Debt Ceiling?

Short answer: nothing good.  As we’re never gone over the debt ceiling before, it’s hard to know exactly what would happen.  A report on CNNMoney, while acknowledging that fact, mentions two (in their words, awful) possibilities for measures that might be undertaken if we can’t raise our debt limit.  The first is cutting spending and/or raising taxes by several hundred billion dollars to make up the difference between our current spending levels and our income levels (and even that level of budgetary balancing will only get us to the end of this fiscal year, in September; expect trillions in cuts or new taxes if we still haven’t raised the debt limit).  Think of the austerity measures imposed on the European Union nations that have gotten bailouts, or the type of belt-tightening you’d need to do if you no longer could rely on credit cards.

The second option is even worse: the U.S. could default on some of its debts.  It’s almost hard to articulate just how bad things would be.  It would certainly torpedo the reputation of the U.S. as a risk-free investment, causing us to spend more to borrow in the future.  It would likely cause a frenzy of selling, as investors here and abroad tried to unload their Treasuries.  Expect the stock market and the value of the U.S. dollar to be devastated.  In a word, horrible.

Q: Golly, That Sounds Bad.  What Do You Think Will Really Happen?

A: Well, as neither possibility in the event of not raising the debt ceiling sounds like the sort of thing the typical politician wants to deal with (particularly in our perpetually campaigning political culture), I feel fairly confident that an agreeement will be reached some time before it comes to that.  There will likely be some spending cuts to appease deficit-cutting Republicans, although not as many as they might like.  There might also be some decreases in tax deductions (or to use President Obama’s bizarre phrasing, ‘spending in the tax code’), or even tax increases, if the Democrats put up a fight.  Ultimately, expect a few months of infighting before a deal is reached, hopefully before the eleventh hour when the world markets start to flee in terror.

What do you think about the debt ceiling fight?  What’s the best method to resolve the current problem?  For any foreign readers, does our government look as silly to you as it feels to us U.S. citizens when it has arguments like this?