5 Ways You Must Prepare for the Debt Ceiling Showdown

5 Aspects You Should Know About the Debt Ceiling

Man With Financial Ball and Chain
Money Ball and Chain. Getty Images

You have certainly heard about it in the news in recent history. The debt ceiling is back (of course, it never really went away). And if you are like most people, you may not fully understand the debt limit rules, or what they are all about. But whether you know it or not, the debt ceiling matters. And it will affect you

Here are 5 specific ways you can prepare for the upcoming March 15th deadline, and the possible fallout (depending on which way everything plays out).

 

1. Understanding the Debt Ceiling

The debt ceiling is the total amount of money the U.S. government has authorized for borrowings, which in turn would be used to pay existing obligations. Notice the key part of that last sentence: existing obligations.

In other words, these are costs which have already been spent, or are already owed. Things like salaries for soldiers, Social Security payments, tax refunds, Medicare benefits, and other federal programs, all represent the various costs which are owed by the American government.

Thus, any debt ceiling debate is not about increasing expenses, but rather is a vote on the choice of whether or not to pay the bills which we have already racked up. To put it much less eloquently, it is a debate on whether or not to default on the nation's debts.

Any increase to the debt limit does not create new spending (although history demonstrates that the federal government will, in fact, think up some new "things to buy").

Rather, that simply allows the government to pay for the promises and obligations which have already been incurred.

This is kind of like getting your credit card bill in the mail, and then decide to pay or not pay it.

Why do we even have a debt ceiling anyway? The limit is intended to control spending (although by different metrics, this historically has not curtailed much in the way of ballooning costs and debts).

Some of the problem stems from the fact that Congress votes on the issue, but costs arise separately through mainly unrelated legislative choices among lawmakers. In other words, leaders from non-Congressional wings of the government rack up the bills, then leave the Congress to vote on whether or not to pay them. This creates a situation where the left hand doesn't know what the right hand is doing. So, the vote in Congress is really about deciding on paying for expenses already incurred through various unrelated, detached, non-Congressional parties.

Many maintain the perspective that we should default. After all, why not stop all this "wasteful overspending"? But, much of the liabilities are actually owed to regular American people. A default means that our government does not pay what is already owed, much of it to you and your neighbors, which translates into a lot of bad results:

  • retirees will not get paid what they were expecting
  • first responders will not receive all they are entitled to
  • the US credit rating would collapse
  • worldwide confidence in our dollar would plummet
  • our governmental bonds would require greater interest payment percentages
  • there could be significant increases in social unrest
  • some vulnerable Americans would fall into poverty
  • as the dollar falls, costs for commodities (gold, coffee, oil) and all imports would rise

2. Accepting the Most-Likely Outcome

Considering all the various downsides (and there are more than the points listed above), it is no wonder why Congress has always been willing to keep increasing the limit. In fact, they have raised the ceiling once a year, on average, for the last 80 years.

Should the limit be raised? Well, if we had put our foot in the sand decades ago, maybe we would be more fiscally responsible now. Alas, we are now at a point where we really do not have any choice. 

In fact, this "worst case scenario if we don't" situation has allowed our nation's debt burden to just keep climbing. We have long-ago reached the tipping point, where our country's debts cannot mathematically be paid — not even close.

The average US taxpayer's portion of the debt is over $850,000. A brand new baby is on the hook for $50,000, which is what his or her part of the liabilities is equivalent to.

Increasing the debt ceiling is not a solution to the underlying problem. That is why, regardless of the outcome of the debt drama, you will hear about many more occurrences of this exact same thing in the coming years.

3. Awareness of Possible Outcomes

This is not a simple yes or no vote. There are all sorts of half-measures which can be applied, and in fact, this current debt ceiling debate is only raising its head right now because the previous limit was only temporarily approved last time.

There can be temporary suspensions, temporary increases, delays to future dates, defaults, or even the most likely scenario: raising it.

An interesting wildcard is that the current Presidential administration has implied they are in favor of decreasing the value of the US dollar. NOT increasing the ceiling would accomplish that particular goal immediately, and given the hard-line, fiscal-focus approach of the current administration, we may be closer to default than at any time in the last 80 years.

4. What Does the Debt Ceiling Really Demonstrate

If the limit is increased, it shows all Americans, and the world, that our nation will keep overspending, rather than curtail costs or act fiscally responsible.

If the limit is not increased, it will negatively impact Americans who have government salaries and benefits, as well as others who rely on different types of government assistance. This will also show other countries that we are willing to default on our debts.

In fact, when the government needs more money to pay for things, like military spending and interest expenses on our debts, they typically borrow it from other countries. And when different nations see that America will not pay back debts, the number of lenders buying our debt will decrease.

And this, in turn, will make our country's obligations harder to meet, which will push America even further to the edge of default.

5. How to Beat the Debt Ceiling

Think of the debt ceiling as a credit card without a maximum spending limit. And imagine how fiscally responsible individuals would be if their personal charge cards had "unlimited" as the maximum spending limit. 

So, how do you beat the debt ceiling? First of all, you need to understand how the federal government is pre-selling your wealth. They use much of the newly acquired debt to pay for things you need, and plenty of things you do not. And by being aware of the possible various outcomes, including the most likely one (raising the limit), you can prepare to get your own personal financial house in order.

This means spend less, pay debts, and stop living on credit. As an individual, there is little you can do to battle the debt ceiling process, but it can inspire you to clean up your own balance sheet. One day the government could run out of both money (already there), and the ability to borrow (that comes next).

And when that day shows up, most people will be completely unprepared. But, if you plan ahead, you might be able to get some leeway and financial time to weather the storm.