By Stephanie Berenbaum – July 13, 2011
Bills, Bonds & Financial Breakdowns
You’ve probably been hearing a lot of debate about the “Debt Ceiling” recently. But, be honest, how many of us really know what that means? And why should YOU care about something a bunch of politicians in Washington are squabbling about? Luckily, it turns out you don’t have to be an economist to understand the current Debt Ceiling Drama our country is embroiled in!
Overspending = Debt
Think of it this way: Like many Americans, The U.S. government spends more than it makes – and does so on a regular basis. And, like so many of us, the U.S. government racks up debt to maintain its spending habits.
As many of us unfortunately know from personal experience, when you reach your credit limit and can’t raise it, a bad situation gets worse. Often, you can’t pay your bills and your credit rating takes a hit. Long story short, that is pretty much the situation the U.S. government is facing right now. (Yes, this is the nutshell version – we’re Fab & Fru, not The Economist).
Bonds and Bondage
When you need extra purchasing power, you may have to call your credit card company and beg to have your limit raised. The U.S. government sells debt to raise money – in the forms of bonds, as an example. So, when you buy a U.S. savings bond, you are loaning the U.S. government money. U.S. bonds are generally seen to be a very safe investment – but that view will quickly change if we cannot keep up with our payments!
So, yes, the US government owes money to everyone who is a bondholder. That probably includes you, your grandmother and … did you know that a whopping 31% of US debt is held by foreign investors? China is the biggest holder, which makes it easier to see what kind of global reach any financial crisis in the US has upon markets around the world…
What’s Your Credit Limit?
Now I’m not sure what your personal credit card limit is, let’s say, maybe…$3,000? Maybe $10,000? For some of you high rollers out there, maybe significantly more? While you may feel embarrassed if you’ve ever reached your limit – don’t feel too bad – the U.S. government is about to max out a $14.3 TRILLION credit limit- they’ve totally hit the ceiling!
The funny thing is that Congress sets the debt limit themselves as a way to supposedly help curb their spending, which is sort of strange because that would be like an individual setting their own credit limit, right? So it’s no surprise that the debt limit continually goes up. This is the major issue at hand right now.
Even though the debate you hear about on the news is WHETHER or not to raise the debt ceiling, it seems like a foregone conclusion that it will have to be raised because the consequences of not doing so will be too BIG.
Running Out of Money
For example, one major issue is that if we do not raise the debt ceiling, the US government would be unable to pay some of its bills and as we all know, when you can’t pay bills, your credit rating goes down. If the U.S.A. can’t meet its financial obligations, confidence will drop in our stock and bond markets, as well as our currency – which is bad news for the global economy as a whole.
And credit ratings aside, there is the human impact of people relying on payments from the government – like social security recipients – not receiving checks they need to live on. So, there are some big issues at stake.
Republicans vs. Democrats
So what’s all the squabbling about? In simplest terms, the Republicans and the Democrats are trying to find a compromise, which involves cutting spending and raising taxes. This is where the negotiations get tricky and the political fire heats up. With the two parties at odds, the ongoing debate is really not so much about whether or not it will have to be raised, but how to get there.
The Apple Doesn’t Fall Far From The Tree
It may (or may not) make you feel better to know that while you are trying frantically to cut your own household budget, Washington is trying to do the same. And with a deadline of August 2 looming, we are sure to hear some news on how this ceiling is going to be broken – and repaired – any day now.| Print