If at any point in the last few weeks you have picked up a newspaper, turned on a TV, logged onto the Internet, or have even spoken to another human being, odds are the subject of the nation’s “debt ceiling” has come up. For days now, Republicans and Democrats have been arguing, er, I mean “debating” the issue. So what’s the debate about, and what’s at stake if a compromise cannot be reached.
The U.S. government is currently operating in a deficit—that is, they spend more than they take in. This is a way of living that many American households can easily relate to. So, like many American’s, our government is living paycheck to paycheck while using credit to pay for things it couldn’t otherwise afford. Problem is, the nation’s credit is just about maxed out.
When a person reaches the point where their credit cards are maxed out, they can either stop spending, file for bankruptcy, or they can decide to apply for another credit card. This last option, in simplest terms, is what Congress is trying to do. They are currently holding a family meeting to decide if the family should go deeper into debt.
However, when the U.S. government needs more credit, instead of getting a new Visa card, it issues Treasury bonds to investors. These investors include individuals, institutions (like mutual fund companies), and even foreign governments. The money raised from these bonds is used to keep the government in business, i.e. supporting wars and paying retirees their Social Security payments.
These Treasury bonds are attractive to investors because they pay a steady interest rate and are considered very safe investments. When the U.S. sells a Treasury bond to an investor, the U.S. is making a promise to pay the investor a certain amount of money, at a specific interval, for a specific period of time. If, however, the U.S. does not raise the debt ceiling, it will be in danger of not being able to meet these financial agreements. If it cannot pay the interest payments to bondholders—even if just one payment were missed—the result would be what’s known as a default.
What would happen if you were unable to pay your credit card bills? After a few missed payments, your creditors would stop allowing you to buy things on credit. Also, if you were unable to make any payments to your credit cards, your credit score would take a hit, which would make it harder and more expensive for you to get credit in the future. If the U.S. were to default, basically the same thing would happen. Their credit would get cut off and their credit rating would be lowered, making future borrowing more difficult and more expensive. There are short-term consequences, too. For instance, retirees might stop receiving Social Security checks and military veterans could see an interruption to their benefits.
That’s just the near-term effects of a default. Further fallout would be felt for years and years to come. Treasury bonds would be less attractive to future investors. The U.S. Dollar, as a commodity, would fall in price, making things more expensive for all Americans. Stock markets around the globe would decline, affecting the retirement funds of not just Americans, but people around the world. Mortgage rates would also climb, causing more damage to an already sluggish housing market.
Elected politicians are playing a very dangerous game of chicken right now. Both sides are trying to use the nation’s potential default as a bargaining chip. Republicans want to extend the debt ceiling just long enough so that we have to revisit the issue during the 2012 presidential election. Meanwhile, members of the Tea Party are using the threat of default as a way to punish Republicans who are seen as not conservative enough. This is an important issue and we as citizens must tell our elected officials what we think of their games. Please use the links below to locate your Congressmen and Senators and write or call them to tell them what you want.