United States Hits Debt Ceiling – Now What?

As expected, the United States federal government rammed up against the designated debt ceiling on May 16, 2011. The question is now what?

Soft Ceiling

The debt ceiling is an artificial number that Congress designates as the most money it can borrow to pay for programs ranging from the military to social security to smaller programs. Yes, you read that right. Congress sets the limit on what IT can borrow. It is like setting the limit on your own credit card!

Hitting our debt ceiling would seem to imply some form of panic should be happening. After all, we might default on obligations if we can’t pay. The reason you haven’t seen Wall Street jumping out of a collective window is this is a soft debt ceiling. We are not out of money on May 16th. Instead, the Treasury has reported it can cover the costs of the government through roughly August 2nd.

What It Means

The debt ceiling is primarily a political tool. This isn’t a case of some foreign country trimming our credit line. This is us doing it to ourselves. The debt ceiling has been raised no less than 10 times in the last 10 years without much impact overall other than keeping us from running out of cash. What is different this time? Republicans are trying to use it as leverage to force spending cuts. 

So, what happens if we blow through August 2nd without a resolution? Well, the federal government would stop functioning and would default on a number of financial obligations. This might sound like a good thing, but it would be a disaster. The dollar would lose what little value it has left and every buck you’ve saved in your 401k and so on would essentially become toilet paper. The end result would be a depression that would likely result in a second civil war or breakup of the country. It would be chaos. No food. No public services. Just a huge, huge mess.

Outlook?

Will the Republicans cause us to default? Not a chance, particularly with a presidential election coming up in the not to distant future. This is purely a political power play to see what they can extract from President Obama before they cave. This is similar to the annual budget debate we just had that ended up with a few billion dollars in cuts.

In short, much ado about nothing.

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