Hello. I’m Kyle Barclay, Senior Vice President and Wealth Advisor at GreenUp Wealth Management. In this video we’re going to discuss the U.S. Debt Ceiling.
Let’s imagine a scenario: Your income just doesn’t cover all of your expenses and you have bills to pay. You can either skip paying your bills, which has negative consequences, or you can borrow money from a bank to pay those bills.
Borrowing money will allow you to cover your expenses for now, but it doesn’t solve the real problem- the problem being that you’re spending more than you’re making.
If you don’t fix the fact that your expenses are greater than your income, you will keep having to borrow more and more money, and at some point the bank may stop lending you money when your debt just gets too high.
This is the predicament the U.S. Government is in right now.
Congress sets a debt ceiling, also known as the statutory debt limit, which is the maximum amount of debt the United States government is authorized to borrow.
Since the U.S. government spends more than it takes in through taxes, government debt continues to grow. When it reaches the debt ceiling, Congress must act to raise the limit or risk defaulting on its financial obligations- their IOU’s.
If the debt ceiling is not increased, the government would not be able to borrow any more money, which would make it difficult to pay its ongoing expenses such as Social Security, Medicare benefits, military salaries, interest on the national debt, and so on and so forth.
This could lead to a default on the government’s financial obligations (their IOUs), which would have severe consequences for the economy and financial markets, such as
- A downgrade in the US Credit Rating, making it more expensive for the government to borrow money
- A decline in the value of the US dollar
- The government shuts down
- A spike in interest rates for the private sector and individuals
However, raising the debt ceiling without addressing the problem that the government spends more than it takes in is also problematic.
Congress is faced with difficult choices.
It can increase income, which means higher taxes for you and me, or it can decrease spending.
Three of the biggest items the government spends money on are Social Security, Medicare, and our national defense. Making cuts to any of these three is politically challenging to say the least.
The last time Congress did not raise the debt ceiling was in 2011.
Republicans insisted on significant spending cuts and changes to programs such as Medicare and Medicaid, while Democrats called for a mix of spending cuts and revenue increases.
This led to a government shutdown and the first ever downgrade of the US credit rating by Standard & Poors.
After several weeks of negotiations, Congress finally passed the Budget Control Act of 2011, which raised the debt ceiling and included a package of spending cuts.
We expect contentious debates in Washington DC as we approach a deadline on raising the debt ceiling.
Hopefully members of Congress will be able to find the right balance between paying its bills, avoiding default, and maintaining the integrity of the economy, while at the same time managing its expenses responsibility for the long-term fiscal health of our country.
I’m Kyle Barclay. Thanks for watching.