Not too long ago, the U.S. reached its debt ceiling. The amount of money the U.S. can borrow from others is determined by law, and Congress has to approve borrowing beyond a certain point. In the past, the debt ceiling has always been raised to accommodate the growing debt in the U.S. Indeed, in the past, both parties have been mostly content to raise the debt ceiling. Now, though, there is a battle brewing as Republicans refuse to vote to raise the debt ceiling. That means that the U.S. won’t be able to borrow money in order to meet its obligations.
According to the Secretary of the Treasury, Timothy Geithner, the U.S. isn’t in danger of default until August 2nd. The U.S. can keep paying its debts until that time by moving money around. If you are a federal employee, your pension might be tapped to help keep things moving until August 2nd. At which point, if the debt ceiling isn’t raised, the U.S. begins to default on its debt.
But, really, does something like that affect you, personally? Well, it could.
Money Go Round
The truth of the matter is that the entire global economy runs on the idea of money — and on the fact that countries are always lending money to each other. Think about the way you interact with money. It’s probably mostly digital. You probably get your paycheck via direct deposit. You buy things by swiping your credit card. Your personal economy is entirely based on the idea that your employer put “money” in your account, and that digital information can then be exchanged with someone else so you can buy something. Forget paper money. Our economy now runs on bit (ones and zeros) money.
It’s the same sort of concept with sovereign debt. Countries agree that they are borrowing or lending so much money, and at such-and-such an interest rate. The information is exchanged, but nothing physical, not even a bond certificate, has to change hands. And if the information says that we can no longer pay as promised, the whole system can be seriously shaken up. And that would affect your ability to meet your own obligations, since it could potentially mean a banking crisis that would make the 2008 crisis look positively tame.
How You Might be Affected
It’s not just the global economy that runs on perception. Financial markets operate on perception as well. If the U.S. defaults, confidence in U.S. assets, including stocks and the U.S. dollar, will fall. That could mean a stock market plunge that could seriously cripple your retirement account. You thought credit was hard to get after the financial crisis? A U.S. default, with so many of the world’s banks invested in U.S. assets, would make it all but impossible. Businesses would also be hard hit by a massive credit market crunch, and that would slow business operations and probably result in mass lay offs.
And, of course, if you are a member of the military, a U.S. default could mean a delay in payments. Also, the inability to pay our brave troops, and finance other defense spending, would make us vulnerable to national security threats.
Of course, this is a worst-case scenario. However, even if all the worst-case scenarios didn’t come to pass, you would likely feel the pinch in some way, because a large part of a global money system that relies heavily on the U.S. to keep borrowing and paying interest, would be severely maimed; that is likely to have consequences you might be surprised at.
The Reality: Higher Taxes are on the Way
Republicans say that they will only vote to raise the debt ceiling if severe spending cuts are made. However, spending cuts aren’t enough at this point in time. Even if we refused to raise the debt ceiling, initiating a default or restructuring our debt, and slashed services (you thought our infrastructure was bad now; just you wait), taxes would still need to be raised. Some politicians are making small noises to that effect, but no one wants to say it out loud — especially with an election year coming up. But, and heaven help whatever president is in office when this happens, someone is going to have to raise taxes sometime.