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What Happens If The Debt Ceiling Isn’t Raised?

This article was written by in Economy. 42 comments.


Democrats and Republicans in Congress, not to mention the President, are battling over what to do about the debt ceiling, an arbitrary limit of government borrowing set by Congress. The government borrows money from investors in order to pay its expenses, like salaries and Social Security, and if the government is unable to borrow, eventually money will run out. That’s a consequence of spending more than you earn, a basic personal finance concept that doesn’t translate well to building what was one point, though still may be, the most powerful national or sovereign economy in the world.

The government has approached the debt ceiling before, and every time, Congress has acted to raise the debt ceiling. Today, politicians are more divided than ever, and it’s looking like a firm deal is not going to happen right away. The most likely outcome is that Congress will delay the issue with a temporary extension of the debt ceiling, moving any action to the future — and closer to the next presidential election when more citizens are ready to engage in political fights. There’s a very slim possibility that the stale mate will continue past August 2, which is when, according to the Treasury Department, the obligations require more than the government has, and some tough choices will need to be made.

If this does happen, President Obama will need to make some tough decisions about who does not get paid. The most likely option will be to furlough parts of the federal government, so military salaries and Social Security payments would not be interrupted.

Rating agencies like Standard & Poor’s will likely downgrade the official AAA rating for the United States’s debt. Even if a temporary solution raises the debt ceiling, this is still a possibility. Many investors would not lend money to the government if its credit rating slips, and interest rates may rise to compensate willing investors for the perceived risk in the system. These interest rates could affect everything from mortgage interest rates to credit cards, making the cost of borrowing higher throughout the economy. However, Japan’s rating was lowered in 2002, and the country suffered no ill effects, so it remains to be seen if rating agencies’ opinions matter as much as people believe. Even S&P has indicated the effects of a downgrade would be minimal.

I think the BBC, whose audience may not be familiar with the intricacies of the U.S. Constitution, sums up the situation interestingly:

Why can’t the Obama administration borrow more? Because it is not in their power. All government borrowing has to be approved, under the US Constitution, by Congress… Perversely, Congress also sets the government’s spending commitments and tax-raising powers. This puts the Obama administration in the impossible position of being required to spend more than it earns, while also being prevented from borrowing the difference.

Another possible consequence is the further reduction of the value of a U.S. dollar compared to other currencies around the world. The dollar’s value has been falling for years, so it may difficult to say if a continued fall is the result of a government default, but it certainly can’t help. If the dollar continues to fall, the typical reaction would be to put money into hard assets like real property.

Over the past few years, people and businesses who could qualify as borrowers have had the benefit of very low interest rates. If interest rates do increase, it would come at a bad time. The country is still trying to claw its way out of a recession, and high interest rates are bad for businesses trying to expand. The good news is only some businesses are trying to expand; most are saving their cash as is evidenced by the reluctance to hire more than the bare minimum of employees.

If the consequences of a ratings downgrade are not as dire as the media portrays, as opined by experts, the issue shouldn’t really be receiving all the attention it has. It does bring to light the issue of spending more than the government can afford, but it’s more of a political issue than an economic issue. Means that our representatives are using the debate on the debt ceiling to distract from the bigger economic problems we are facing, like unemployment, a lack of business growth, a substandard education system, endless spending on wars, and ineffective regulation of the financial industry.

Photo: o palsson
Kiplinger, New York Times, BBC, Bloomberg, NPR

Updated August 3, 2011 and originally published July 27, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 42 comments… read them below or add one }

avatar lynn ♦155 (Cent)

The NewYork Times article on MSN opened with the president saying the SS checks won’t go out. Not welfare will not go out, but the checks that we paid for won’t go out.

Is anyone else sick of scare tactics? SS is suppose to be a separate account. How did it become the first thing to go? Why do they borrow to pay for it? Have they IOU’d the entire account?

God help us.

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avatar jim

“Have they IOU’d the entire account?”

Yes. Thats how it worked the entire time they had a surplus in SS.

The government is running a debt so rather than borrow money from other entities (private citizens or foreigners) they borrowed the SS funds. About $4 trillion of the debt is money the govt. owes to itself.

Keep in mind that SS is not built like a savings account. THe only money borrowed with IOUs was surplus money. SS is a pay as you go system where the tax dollars of working individuals goes directly to retirees.

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avatar someguy

Social Security is really supposed to be a failsafe for the poor, not a retirement plan or part of a retirement plan for everyone else more fortunate.

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avatar SteveDH

What do you mean “really supposed to be”? What you’re saying comes from politicians trying their best to rewrite history. Social Security was always intended to provide income in retirement and did not start with any built-in “poor-trigger”. It was never a failsafe it WAS a retirement insurance plan you paid into. Changes came much later when 85% of Social Security entitlements became taxable for those with additional retirement assets to draw from and with the addition of welfare-through-Social Security such as SSI. SSI is paid to a “U.S. citizen or national, or in one of certain categories of aliens”. Aliens who don’t have active deportation cases are apparently eligible for SSI according to its website. What Social Security was “really supposed to be” is a heck of lot different than what it is today.

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avatar shellye ♦107 (Cent)

I always thought SS was created as an emergency safety net for senior citizens during the Depression who didn’t have any other means of income, and then it became an entitlement program where younger generations were “taxed” in order to keep the program funded for its original recipients. Then the next generation came along, and had to pay for the previous generation, etc. It will be hard to ever eliminate the program because at some point, there will be a generation of people that gets ripped off because they’ll have paid into it without getting anything out of it.

It just goes to show you that once you start giving away money, there’s no going back. Sigh…

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avatar lynn ♦155 (Cent)

No. It’s a retirement program that we were forced to accept. It was during my lifetime, I’m just not sure when. Because of it, my generation counted on it as part of the retirement plan. We felt ‘safe’. Hindsight – not the brightest bulbs in the box.

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avatar uh2l

What about the scare tactics of the Republicans who say that increasing taxes on the very rich will severely hurt the creation of jobs? (Funny how the tax cuts haven’t led to job creation). If millionaires pay higher personal income taxes, that doesn’t impact corporations’ taxes and need to hire people to grow and innovate. That has to do with corporate tax rates and many corporations find ways around those anyway. The key to job creation is hiring people! I feel that many in business have a vendetta against Obama and refuse to hire. They claim they can’t hire with uncertainty but there is always economic and political uncertainty and the unemployed make bad customers. With it being an employers’ market, now is the best time to find talent.

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avatar lynn ♦155 (Cent)

Can we stay away from the division of the parties? They both have the same agenda.

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avatar Mike

“I feel that many in business have a vendetta against Obama and refuse to hire”

And you base this on?

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avatar Apex ♦478 (Nickel)

He bases this on his political ideology. See business are greedy and evil and they hate Democrats, and apparently especially Obama, so they would do anything to hurt him. However it must be terribly painful for them because their greed would want them to hire and expand to make more money and according to this comment they must think they could do so but they simply refuse to try to make more money because it would create a job and they would sooner make Obama look bad than to make more money for themselves. And the vast majority of them must be doing this because no one is hiring.

Nevermind that many of the CEOs of the largest companies are Democrats.

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avatar SteveDH

Maybe a disclaimer is appropriate. I’m retired and a recipient of Social Security payments. Although those payments represent less than 30% of my retirement income (I pay taxes on 85% of my Social Security Income) I reject any notion that I should have discounted Social Security as a part of my retirement plan. Relying on the promises as well as the full faith and credit of the US Government while paying Social Security taxes for 42 years should not be punishable. Those that suggest differently are blowing political smoke – or smoking political dope – one or the other. ;-)

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avatar Mike

I’m sure any change in social security won’t affect you. It will probably affect my generation in the form of less or no payments and higher retirement ages.

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avatar lynn ♦155 (Cent)

Yes, Mike. The concept of raising the age is out there. They have already done this a few years back. It was suppose to fix things then too. All it did was give the government more money to ‘borrow’. The moves made in Washington apparently are not for concern of the citizens. You may want to remember our generation was not as savvy back in the day. We believed the trash they handed us and found out in the past decade or so what lying thieves we had in Washington. Now we’re stuck with less than the current generation will be, because your generation knows what has to be done.

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avatar Liz

scary stuff

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avatar lynn ♦155 (Cent)

Indeed, Liz.

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avatar DonnaFreedman ♦45 (Newbie)

My aunt is 87 and incredibly frail; she just got of the hospital after a bout with pneumonia. Her son, who lives with her, is 69 and in poor health after a recent accident. Neither of them could work before and they certainly can’t work now. If their checks don’t come they’re in deep trouble. I and some other family members will of course make sure the lights stay on, etc., but I wonder what those who have no one to help them will do.
I also have a close relative on Social Security disability. Fortunately his wife has a job. Not every disabled person is that lucky.
Social service agencies and churches must be holding their collective breath right now.

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avatar SteveDH

I did not intend to suggest that aid to those with disabilities is either a waste or bad politics, rather that these were inappropriately blended into the Social Security Retirement program. There is always a need for others, including the government, to step in and help.

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avatar someguy

@SteveDH: After reading the SSA of 1935, I have to agree with you that social security, as written in the original act, was not only intended for the poor (http://www.ssa.gov/history/35actii.html).

That said, it frosts me that I am forced to pay 12% to a government retirement plan over which I have no real control. As a business owner, my return on capital exceeds my forecast social security benefits and I have a philosophical issue with someone else making decisions for me. It is even worse if the large payments I make now are funding current retiree’s payments. That smacks of a pyramid/ponzi scheme to me.

@SteveDH — Outside of the current debt-ceiling issue, what do you propose for both social security old age benefits and for Medicare? Current entitlees are costing more than they put in — who should foot that bill?

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avatar SteveDH

I understand the frost … I too have had lots of questions about what they have done with what I contributed. It was only fairly recently that Social Security began seeing a negative income statement and it still has a strong balance sheet (ignoring, of course, those “special bonds” and who owns them). Increasing life-spans, medical achievements and a whole hosts of other factors are driving it towards its predicted 2037 (last I heard) insolvency. Raise the retirement age. Eliminate the earnings cap. Eliminate cost of living adjustments. Means-test above a certain entitlement amount. Any combination of these may avoid collapse. I didn’t compute COLA into my retirement plan and although any means-testing done might reduce my benefit, it wouldn’t necessarily send me to the food bank. That said, I feel I still deserve a return on the dollars I sent to Washington.

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avatar shellye ♦107 (Cent)

I think most people are confused about what the debt ceiling even means, but if the political parties can’t agree on a plan, everyone is going to find out very quickly what it means. Flexo has an excellent point about Japan’s rating being lowered and it not making much of a difference in anything. Maybe the media is stirring everyone into a frenzy with all the hype, talking heads and nonsense that we’re hearing night after night.

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avatar SteveDH

Well said! The frenzy that has accompanied all of this is absurd. Even kitchen table discussions about major purchases sometimes involve raising your personal debt ceiling, and they oftentimes have an effect on your credit rating. Done right – neither requires this kind of drama.

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avatar skylog ♦368 (Nickel)

i am just so fed up with everything about this whole situation. everything. from the fact that it has turned into yet another political waste of time, effort and money. to the fact that the media continues to get many, many things wrong. to the fact that this continues to go on instead of any work being done on real issues.

just fed up.

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avatar lynn ♦155 (Cent)
avatar someguy

@uh2l — I do a fair amount of hiring for my own company and also on behalf of others’ companies. While there are a lot of applicants for jobs I post, there isn’t a lot of top notch talent included in the respondees. Unfortunately (for many), I think the workplace is becoming stratified. The top 10% of the talent pool doesn’t have and never has had an issue finding good work. In the past, it may have been the top 25% that didn’t have trouble. This may be due to widescale globalization in many industries. I certainly am not holding back on hiring as some kind of anti-Obama scheme and none of the others I know are either. Even if I don’t like Obama’s policies that affect business, I am not going to stall hiring — that would be cutting off my nose to spite my face.

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avatar Geoff Hazel

What is that little picture icon on this post? It reminds me of the ceiling in the Washington DC subway.

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avatar Luke Landes ♦127,435 (Platinum)

Good eye! That’s exactly what the photo is. Here’s the source.

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avatar SteveDH

Is there any significance to that fact that you chose a ceiling that is already in a hole? Way,way too subtle.

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avatar wylerassociate ♦162 (Cent)

What bothers me is the hypocrisy of this issue. The GOP never had a problem spending money on wars, medicare part d or raising the debt ceiling when George W. Bush was the occupant of 1600 Pennsylvania Avenue. Now all of a sudden the GOP is “concerned” about debt and throwing out the phony talking point of it’s bad to tax the “job creators” which only the kool aid drinkers believe. Both parties in this country are worthless as is the media who covers them. The only way to be an educated consumer of news is to read everything you can find from books, blogs, journals not just what fits your political viewpoint.

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avatar crashdamage1957
avatar Mike

I agree. Even our current president was against raising the debt ceiling when he was in congress. Now he considers it irresponsible to allow a debt increase. Quite a flip flop.

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avatar MC

Agreed. Being a MN native though, I think this Tea Party constituent is willing to force the rest of us to live with a much smaller and hand-cuffed government. They’d like the US to default. They’re proposing that we Cut, Cap and Balance. This is good on a personal balance sheet but I’m not certain it is for our national balance sheet. I think it’s posturing and clearly a hypocritical take.

What I’d like to hear from these Tea Party Conservatives is what’s their solution when all these banks fail, if the Government isn’t in position to bail them out. Where would we be today? 25% unemployment?

As one who still lives in a house that’s has seen it’s value decrease by 50% since 2004 with a 5 yr arm and despite paying down the principal fast, can’t afford to refinance. Any interest rate hike would be extremely detrimental to home-owners who’ve already bore the burden of increasing property tax due to the conservative Governor now running for president. If that’s a supposed outcome of all this; I don’t understand how these people don’t leave Washington Tarred and Feathered.

I’d like a more fiscally conservative government too but I understand that they need to invest in times of uncertainty and they need to pay down debt when times are good. What happened with the Bush regime is we gave all of the surpluses back to the wealthy and look where those Job creators have gotten us.

I think Obama has moved clearly to the center and that’s a good thing, but not if we don’t have a Congress that can’t get things to the table that get things done for the good of all Americans.

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avatar Bobka ♦13 (Newbie)

Hold onto your wallet. If the value of the dollar falls because of the debate in Washington, the price of gas will most likely go up. This may occur whether or not Congress actually comes to an agreement to raise the debt ceiling or not. This is a crisis of our own making. I’m sure our lawmakers are the laughingstock of the world.

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avatar Hal (GT)

Social Security is not supposed to be paid by borrowing money. It is supposed to be paid by the SS tax. If it hasn’t been than I think we need an investigation. And perhaps some House cleaning.

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avatar Josh

Hal,

Social Security ran a surplus until recently. Every year, the trustees of the program release a report on its fiscal health. In recent years, that has meant making a prediction about when the program will pay more in benefits than it receives in revenues. SS recently went into the red. In the past, when the program had a surplus, the money was spent on other things and replaced with a US gov’t bond. That is why you see two different debt numbers: total debt and debt held by the public. The largest single chunk of our total debt is actually intergovernmental debt. Most of this is intergovernmental debt is related to SS.

All of that aside, you’re absolutely right about the house cleaning.

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avatar Sandy @ yesiamcheap

SS went into the red because of high unemployment coupled with the Baby Boomer generation retiring. That’s a huge group that the rest of us are paying for.

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avatar Bonnie

That’s a huge group that the rest of us are paying for.

Each generation will pay for the generation that preceded it, and so on and so on, until the SS system is revamped. The question is…HOW do you revamp this system without shortchanging a generation that has contributed to it for decades? IMO, the SS system would be completely solvent for many generations if the government didn’t borrow from it. But, that bridge was crossed long long ago. If the government stopped borrow from it TODAY, what would the outcome for the SS system be? Probably stable. But, if the governemnt stopped borrowing against it, where would the government be?

Being someone who currently contributes to the SS system, I have no problem with paying for the generation before me…those are some of the hardest working folks that gave us the ability to live the lives we are able to lead today…as our generation will provide innovations and technologies that will benefit the next generation…and so on…it’s called progress. What I resent is the government borrowing that money with little to intention of paying it back. At some point, it will affect a generation negatively…and that day is quickly approaching. EVERYONE wants a return on investment…and contributing to SS most definetly IS an investment…ask anyone who MUST contribute to it…we would like a return on that investment too.

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avatar lynn ♦155 (Cent)

I’m interested in knowing how you are connecting unemployment with SS?

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avatar Hal (GT)

Hey, Josh. Thanks for taking the time to reply. Seems to me that the money should have been left alone and not spent on other things. Of course the problem with the money is that it’s getting devalued substantially.

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avatar Mike

I really don’t trust any spending cuts unless it is done on the first year. Congress always does deals to cut spending in future years. Lo and behold they never seem to follow through on their promise.

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avatar Ceecee ♦53 (Newbie)

In a republic, governing isn’t always seamless because we are all allowed our opinions. If it were a dictatorship, this would have been settled with one three-second decree. I keep reminding myself of this when I get frustrated with the process…..like now.

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avatar Cejay ♦1,521 (Half-Dollar)

Great point Ceecee. Maybe, I will remind myself of that when I get frustrated. And fristrated is what I am.

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avatar qixx ♦1,880 (Half-Dollar)

I don’t think we should change the debt ceiling until we can solve the problems that cause the debt ceiling to need to be raised every few years. This just seems like we are looking the best headache medicine when we have a cold (and need cold medicine).

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