What Is the Debt Ceiling and Why Do We Care?

As you’ve probably heard, lawmakers in DC are currently embroiled in debate over the debt ceiling. Some want to raise it, while others remain committed to refusing. But what is the debt ceiling, exactly? And why should the average person care about it?

Essentially, the “debt ceiling” refers to a limit on government borrowing. Each year, Congress determines a budget for government spending. And as you know, that budget comes from the taxes we all pay. However, the government consistently overspends the budget each year, resulting in the need to borrow funds in order to continue paying for everything within the budget. The debt ceiling determines the amount that the federal government is allowed to borrow.

Technically, we already hit the debt ceiling on August 1. The Treasury Department took “extraordinary measures” to pay the bills, but those measures will soon be exhausted. By October 18, the debt ceiling must be raised or the government will officially run out of funds.

Now, the debate over raising the debt ceiling means a potential inability to pay for everything within the federal budget. The real-world impact could mean that Social Security payments are absent or delayed, the child tax credit payments are halted, Veterans or military members could miss payments, federal workers cannot be paid, and so on. Essentially, anything paid by the government is at risk if Congress cannot find a way to cover all expenses within the budget.

If the government can’t pay all of its bills, certain payments (and we don’t know which ones) would stop. And when government spending stops or slows down, the impact upon the economy can be disastrous.

Moody’s Analytics estimates that a failure to raise the debt ceiling could result in the loss of 6 million jobs. The unemployment rate could rise from 5.2 percent to 9 percent, and the stock market could lose a third of its value. That would wipe out $15 trillion in household wealth.

But of course, those who oppose raising the debt ceiling point to ever-climbing debt as an unsustainable situation. Who will eventually pay for that debt?

There’s no need to panic, but give us a call if you’re feeling concerned about this situation. We can help you analyze your portfolio and decide how to weather any storm that comes your way.