What is US Debt Ceiling And How Does it Impact Me?

By now you know that there is a big political/economic debate over the “Debt Ceiling” in the United States.

Every News TV channel, radio stations, and publication is full of coverage on the potential of United States of America going bankrupt if this Debt Ceiling thing is not raised thus impacting the US economy and in turn the global economy.

If you are an average person like me you will understand the news, the impact, and implications that these news outlets are talking about but you might be scratching your head and asking yourself “So what is this debt ceiling”? And “How will it impact me?”

Well I decided to take this evening before the long weekend and try to answer both of your questions to the best of my abilities.

Simply put the Debt Ceiling is a cap on how much money the US federal government can borrow.
As of May 2011, approximately 40 percent of U.S. government spending relied on borrowed money to run its day to day operations/services.

To give you a basic analogy let’s say you are self-employed and 40% of your household expenses are on your credit card month over month – since your business doesn’t make enough money to pay for all your house hold expenses. And because you are only making your minimum payments you are now reaching the credit limit on your Visa or Mastercard.

At this point you have three choices:
1. Call your Credit Card company, in agreement with your family, and request for a credit limit increase – short term fix
2. Charge more for your goods and services or find other sources of revenue – midterm fix
3. Cut down on your monthly household expenses so you are not dependent on your Visa or Mastercard – long term fix
What’s going on in America over the last few weeks is that the current administration wants to call their Credit Card company to increase the credit limit (ie debt ceiling) but some members of the family, members of House of Representatives & Senate – which is an equivalent of lower and upper house of parliament in most countries – are not in agreement, and instead wants the current US administration to work on point 3 first, before asking for a credit limit increase. These members of the family are mostly Republicans while the current US administration is Democrats.

The Obama administration is counter proposing that they will work on point 2 but would still require the original increased limit request so they could continue to run the country, and in long run get to point 3.

The reason that all this debate and drama is going on every day in Washington DC is because the family – US House of Representatives and US Senate – needs to work together and reach a compromise. And because it’s one political party against the other there has been a lot of politicking over the last two weeks with no side willing to compromise hence all this intrigue and drama.

Ultimately each side has to meet half way and try to reach a compromise for this crisis to be averted.

Now let me try to answer the 2nd part of your question: “How will this potential crisis affect me?”

The United States of America is the largest economy in the world, and every country is either directly or indirectly dependent on it through trades, investments, financial aid, or local companies dependent on business with their American counterparts.

If the debt ceiling is not raised the American Treasury (equivalent of finance ministry in most other countries) will run out of money for the day to day operations of the United States, and the American economy will collapse.

The first impact, if you live in United States, would be that some of the services could get affected including paying Social Security and Medicare benefits, military salaries, interest on the debt and many other items.

Not raising the debt ceiling will further devalue the American dollar which will have a direct negative impact on private companies hence impacting your job and ultimately your paycheck.
If you live in one of the countries that is a big US trading partner due to the above reason you could feel a lot of heat also.

If you live in one of the countries that is dependent on US for financial aid, your country could kiss that aid goodbye which will have a severe impact on you also.

In short the entire world is so much dependent on the US economy that if it fails, we will all see the effects. Most of the countries which sustained a huge economic crisis in 2008 – with the exception of China, India, and Brazil – are just standing back up on their feet, and cannot afford another economic recession this soon.

Now if I have scared you enough let me also tell you that I don’t believe there will be a crisis and the United States of America will be able to reach a solution before Tuesday August 2nd 2011 – may in the 11th hour but on this July 29th 2011 with all the doom and gloom about the US economy rest assured that the deal will be reached.

Why do you I think like this? Well I would keep it to myself as this is not a forum where I discuss my political opinions. If you really want to know give me a call and we discuss my opinions over a coffee.

Thanks for reading.

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