If you’ve been watching the news lately, you’ve probably heard all about the “debt ceiling” and how dire it would be if Congress didn’t raise it. Fortunately, the sky isn’t really falling, at least not yet. Just like at other times in history, negotiations and wrangling must take place in Congress before a deal can be reached.
In the meantime, you might be wondering what the debt ceiling is and why should you care?
Chester Spatt, professor of finance at the Tepper School of Business at Carnegie Mellon University, describes the debt ceiling as “a limit on the ability of the federal government to increase its debt.”
It’s a bit like your favorite credit card, except the government is the one that accumulates the fees. Your credit card has a spending limit, and if you want to exceed it, you must ask your card issuer to increase your credit limit. If approved, you can continue your spending spree as long as you meet the minimum payments.
That’s good news for the card company, but not so good news for you, is it? After all, you will eventually have to pay every penny you borrow, plus interest and fees. At least that’s how it is should work in theory.
But why should you care how much our public debt is growing? We reached out to experts to find out how the debt ceiling can impact ordinary Americans, and here’s what they said.
Does a higher debt ceiling mean higher taxes?
Spatt points out that a higher debt ceiling and higher public debt inevitably suggests higher future taxes, reduced spending, or both.
Of course, the idea that the government could actually cut spending in the future seems downright absurd at the moment. Taxes are much more likely to rise as public debt rises, not only to repay borrowed funds, but also to service the government’s growing debt.
We’re already seeing higher taxes offered by the Biden administration, at least for households that make more than $ 400,000. A higher debt ceiling just means more of that later, although no one knows what tax rates will look like in the future.
It’s also important to remember that unlike your household budget, the government can basically go on and on, and it has the power to tax and raise money to foot the bill. For example, the UK finished repaying debt incurred during World War I in 2015 – almost 100 years later. Since governments have been around for long periods of time, it’s important to realize that debt incurred is not due next month like your credit card bill.
Wayne Winegarden, senior business and economics researcher at the Pacific Research Institute, says no increase in the debt ceiling will result in “short-term costs created by late payments, workers’ leave and, depending on disruption. , negative impacts in financial markets. “
He also points out that raising the debt ceiling also comes with costs. However, the current debate obscures the proper perspective on the issue, he says.
In a story recently published by Winegarden in National Review, he argued that the root cause of the problem was rampant government spending that has occurred over the past two decades. He writes that our overspending “hurts the US economy, contributes to distortions in the global capital market, and costs taxpayers dearly.”
Aspiriant’s financial advisor Sandi Bragar points out that further disruption could and will likely occur if the debt ceiling is not raised. For example, we may see rising interest rates, declining returns on investment across the board, reduced hiring, and other issues.
And in the short term, that could also mean a market correction.
Unpaid government invoices
Bragar also notes that the government would not have the capacity to pay salaries, social security and health insurance. Nicholas Creel, who is an assistant professor of accounting in business law at Georgia College and State University, says Social Security could be profoundly affected (at least in the short term) as the program pays more in disbursements than it does. it does not take it via the payroll tax which finances it.
To make up the difference, Creel says he relies on reserves in the form of US government debt that is regularly repaid.
“If the government is not able to take on more debt, it finds itself in a position where it may not be able to pay off old debts, such as those it owes to social security,” in order to fund new spending on projects like national defense, ”he says.
Bryan Koslow, Founder and CEO of Clarus Group, says that not raising the debt ceiling could also have significant indirect effects, including effects on our currency. Other countries, fearing instability in the United States, could choose not to buy U.S. Treasuries, which would cause interest rates to rise dramatically, Koslow said.
In addition, the US dollar could lose value, making imports more expensive when inflation is already a problem, and rating agencies could downgrade US credit, causing borrowing costs to rise. Ultimately, it could affect all types of debt, such as mortgages, auto loans, etc., he says.
Brock Pierce, who is chairman of the Bitcoin Foundation, said any talk about the debt ceiling could also lead to more volatility in the markets.
This could lead more investors to move away from traditional investments and turn to alternative options such as Bitcoin and other cryptocurrencies.
“The higher debt ceiling and increased concerns about inflation will increase investor interest in cryptocurrencies as a hedge against endless debt,” Pierce said.
Ultimately, it seems likely that Congress will raise the debt ceiling to a new high. This has always happened, and the consequences of not raising the debt ceiling are far too dire for the government to take this chance.
MDH Investment Management financial advisor David Bickerton points out that Congress has raised the debt ceiling almost 100 times over the past century and this time around should be no different. And once they do, all tensions over our collective debt crisis can be suspended until, in the future, our debt begins to approach the new debt ceiling set.
“The only question is how far Washington gets us from the edge and which side flashes first,” Bickerton said. “If Congress does what it always has and raises the debt ceiling, most Americans will never even notice this has happened.”
But if it doesn’t, it could have a huge impact on Americans – a pullback in stock markets, higher interest rates, and economic instability.