What you need to know about the US Debt Ceiling

May 23, 2023

In what USA Today calls, "a terrifying game of chicken", the United States reached the largest debt ceiling we have ever seen, 31.4 trillion dollars, in January of this year. With a deadline to raise the debt ceiling looming in Congress, we could run out of money as early as June 1st. With no agreement in sight, what does this mean for you and your family?

First, let’s discuss what the debt ceiling is and how it came about.

The debt ceiling is the limit placed by Congress on the amount of debt the government can accrue. To pay its bills to those it borrowed from and dole out money for everything from Social Security benefits to military salaries, the government needs more money then it currently raises with taxes. Due to this deficit, the debt ceiling must be raised so more money can be borrowed, or the US will default on its debt payments.

OK, sounds simple enough, we should just raise the ceiling again, right? They have already done it 78 times since 1960, so what is stopping them now? The problem is over the years both parties have tied it to government spending, and they have been using the debt ceiling to force the hand of the current administration.

Thus, the stalemate we are in now.

So, the American people who work in government jobs or branches of the military or that receive veterans’ benefits could see disrupted or partial paychecks. Medicare and Social Security would only be affected if the government saw a shutdown and workers were not able to process payments in a timely matter or if the government did not have enough cash on hand to make the payments on time.

This is not the only ramification from a default. Because the U.S. has never defaulted in U.S. history, Treasury Bonds have always been viewed as a safe investment. A default would change that and cause chaos both domestically and globally. The U.S. would most likely be downgraded on its credit rating once again, and faith in the U.S. dollar would waver.

The U.S Treasury website warns that a default on debt “would precipitate another financial crisis and threaten the jobs and savings of everyday Americans.” A default is dangerous and a clear sign that the U.S. is not able to govern itself in a way that is financially functioning.

Now you are probably thinking, this sounds bad, and you would be right to a certain extent. But the U.S. is not the only country with a huge amount of debt or a debt limit. However, we are the only country that requires approval to raise the debt ceiling. Holding debt and paying service on the debt to make up for a deficit has been happening since the revolutionary war. A debt ceiling was first placed by congress during World War I, it was meant to give blanket authorization for the Treasury to borrow money up to a set amount to fund the war. Just recently has it been used for hostage like manipulation with law makers. Which leads to fighting and makes agreeing on a solution almost impossible.

The good news is many experts say they do not see the government allowing the U.S. to default on their debt. A solution will have to be reached or the administration will be forced to use executive power under the 14th Amendment, allowing the President authority to order the nations debts to be paid in its entirety and on time regardless of the debt limit Congress has in place.

Until the debt is reduced to match the intake of taxes, spending is cut drastically, or Congress changes the way we manage our debt and spending caps, we will continue to be in danger of a U.S. debt default.

In the meantime, what should you do to protect yourself and prepare for a debt default? Make sure you have a plan, no matter what you decide to do. Having a plan will keep your emotions in check and keep you from making emotionally charged decisions that could backfire!

If you are feeling unsure if adjustments should be made in your portfolio, or you just want a second opinion to be sure, message me and let’s talk.

To read more on the debt ceiling or to read the full articles click on the following links:

USA TODAY "What is the debt ceiling? What happens if we default, and why should you care?" By Anna Kaufman

NPR / OPB "Nine Question You May Have About the Debt Ceiling" By Kelsey Snell