Translation: The government is cut and can no longer pay its bills without taking extraordinary measures.
“The United States has a budget deficit, which means that it does not generate enough money from taxes and other sources of revenue to fully finance its operations. To finance its operations, the US issues debt to continue providing services to its citizens and fund costs,” said Wes Moss, a financial planner. certified and managing partner of Capital Investment Advisors in Atlanta.
So what does this mean? Lawmakers have months to reach an agreement before the U.S. fails altogether. Some are pushing to increase the debt ceiling, others think the US should reign in its spending.
Debt ceiling, explained
The debt ceiling is the maximum amount, set by Congress, that the government can borrow to cover its bills. This includes Social Security payments, military pay, and more. The debt ceiling was first implemented in 1917 and was originally set at $11.5 billion. In 1939, Congress created the first aggregate debt limit that covered almost all government debt and set it at $45 billion.
It’s important to note that raising the debt ceiling doesn’t increase the amount the government is allowed to spend—it prevents the government from paying bills and obligations that it already owes. But the debt ceiling has increased before—about 80 times since the 1960s.
“Once you reach the debt ceiling, which is currently just over $31 trillion, the government is no longer allowed to issue debt to finance its obligations. There are some “extraordinary measures” that the Treasury Department can take to buy some time when Congress discussing the number of increases to the debt ceiling,” Moss said.
Some of these measures include: suspending the sale of State and Local Government Series Treasury securities; redeem existing, and defer new investments from the Civil Service Retirement and Disability Fund and the Postal Service Retirement Health Benefit Fund; postpone the reinvestment of the Government Securities Investment Fund; and postpone the reinvestment of the Stock Exchange Stabilization Fund.
3 ways the debt ceiling can affect your wallet
If the debt ceiling isn’t raised, it doesn’t directly affect consumers, but it can affect the larger economic climate and have an effect that hurts consumers’ wallets, affects major spending programs, and causes havoc in financial markets.
1. stock market volatility. Political deadlock over raising the debt ceiling or not has a history of creating bumpiness in the stock market. “While the sky certainly hasn’t fallen yet, this could have a bigger impact on the market down the road if the ceiling isn’t raised,” Moss said. “Take 2011 as an example – the political deadlock caused the stock market to reel. The S&P even fell 7% in one day during the 2-month war. The bond market had to cope with the US government’s perceived deterioration in credit quality.
Your move: Diversify your portfolio. Trying to time the market is a losing game. Spreading your risk across multiple assets, regardless of what the market or politicians do, will ensure that you don’t experience bigger losses by knee-jerk reactions to short-term losses.
2. benefits and layoffs are suspended. If you receive government benefits like Social Security payments, veterans benefits, or Medicare benefits, failing to meet the debt ceiling can cause those benefits to be suspended.
Your move: Review your budget. Now is the time to save a little extra in case there is a major change in income or benefits. Prioritize putting extra money into an emergency fund. And if you want to increase your savings – try a high-yield savings account to get a high APY on your funds.
3. Borrowing can be more expensive. Hitting the debt ceiling lowers the country’s credit rating and increases the cost of borrowing. This can raise interest rates on credit products, home loans, car loans, and more.
Your move: Try to boost and maintain a strong credit score if you want to borrow money to finance a big purchase in the future. Even in a high-interest environment, a higher credit score can help you secure the best terms.
Takeaway
The debt ceiling plays a major role in the health of the US and the global economy, but on a micro level it can affect how consumers spend, what they pay to borrow money, sources of income and more.