The 5 Ways the Debt Ceiling Will Affect Your Money

By Chika

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Last Updated: January 26, 2023

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As early as June, the United States might be unable to pay all of its obligations, placing pressure on Congress to increase or suspend the federal borrowing ceiling.

The U.S. is approaching the current $31.4 trillion borrowing limit, according to the Treasury Department, which has prompted it to start using 'exceptional measures' to manage the government's cash flow through the spring.

Deep political divisions in Congress over the debt ceiling and government spending have led to concerns that legislators may not be able to increase the cap in time to prevent a potential debt default.

Democrats favor raising the debt ceiling with no restrictions. Republicans want to begin talks with the White House and are seeking spending reductions as a prerequisite for increasing the ceiling.

Whichever way, like the proverbial grass that suffers when two elephants fight, your finances are bound to feel the brunt of the ongoing political tussle in Washington financially.

 

What is a Debt Ceiling? 

The debt ceiling, sometimes known as the debt limit, sets a limit on the total sum of money that the federal government is allowed to borrow through the purchase of U.S. Treasury securities, such as bills and savings bonds, to meet its debt commitments.

The United States must borrow enormous quantities of money to cover its debts, because it has a budget imbalance.

 

The limit has been reached. Now what?

America reached its financial debt ceiling on January 19. This means the U.S. Treasury Department will start using "exceptional steps" to keep paying the government's debts.

These policies are simply instruments for fiscal accounting that limit some government spending so that bills can be paid. By June, those alternatives may be exhausted.

 

5 Ways a Debt Ceiling Crash Could Affect Your Money  

1. No more federal benefits.

Tens of millions of American households may not get some government benefits, such as Social Security, Medicare, Medicaid, and federal assistance for veterans, housing, and nutrition, on time or at all.

For example, if the pay of active-duty military members is frozen, other government duties, such as national security, may be impacted.

 

2. Economy slides into recession.

A recession "would seem unavoidable" in these conditions because affected people would have less money to inject into the U.S. economy.

Many jobs would be lost during a recession, and unemployment would rise.

 

3. Borrowing costs would increase.

The U.S. dollar and Treasury bonds are typically regarded as safe assets by investors. 

If the debt ceiling were to crash, then rating agencies would downgrade U.S. debt instruments while investors would demand Treasury bonds at considerably higher interest rates to make up for the increased risk.

Since rates on mortgages, credit cards, auto loans, and other sorts of consumer debt are tied to changes in the U.S. Treasury market, borrowing costs would increase for American consumers. Additionally, business loan interest rates would increase.

 

4. Stock market would plummet.

A default would certainly result in stock markets falling and send shockwaves across the world's financial markets.

Even the prospect of a default during the 2011 debt limit "crisis" resulted in a lowering of the U.S.'s credit rating from Standard & Poor's (formerly known as S&P Global Ratings) and significant market gyrations.

During the 2011 debt limit crisis, which was perhaps the closest brush the United States has had to default,  the S&P 500 plummeted close to 17% between July 22 and August 8.

 

5. Financial hardship for younger Americans.

Although Congress has consistently made a last-ditch attempt to extend the debt ceiling and prevent default, Americans may not be spared from the resulting repercussions in the future. Raising the debt ceiling only shifts the cost of running the government to future generations.

Although current generations acquire government securities voluntarily, future generations will bear the debt burden by paying higher taxes, making it more difficult for Americans to enjoy the American dream or even to afford basic needs.

Debt is already crippling the younger generations, leaving many unable to achieve life milestones. Also, given that inflation is already eroding the purchasing power of the dollar, additional debt would make it more difficult for younger generations to live financially stable lives. 

In 1940, the median home value in the U.S. was just $2,938. In 1980, it was $47,200, and by 2000, it had risen to $119,600. Even adjusted for inflation, the median home price in 1940 would only have been $30,600 in 2000 dollars. In the third quarter of 2022, the median price of existing homes in the U.S. was 392,000 U.S. dollars.

As such, though raising the debt ceiling may bring some form of a reprieve now, it only transfers the bulk to the next generation, inadvertently making them poorer in the long run. 

 

 

The Debt Ceiling: The Bottom line

Depending on how long the political impasse continues, whether the United States defaults, and how long that default lasts, will determine what happens to the American economy and your wallet.

Even if it means reducing their discretionary spending to free up some money, Americans who wish to secure their financial future should make sure they concentrate on accumulating an emergency fund.

Investors should have a long-term perspective and refrain from reacting excessively to short-term events in Washington that are expected to be addressed.

There's little doubt that the economy would suffer if the debt ceiling wasn't raised, but there's no telling what would happen if it did. But more worrisome is that the government may be shortchanging the future of younger generations just to satisfy its big appetite for spending.

Photo by Karolina Grabowska

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