While the government is currently in the middle of a debt ceiling deliberation, everyone is anxiously thinking about the consequences if the debt ceiling is not raised by the expiration date of August 2. Many people have asked me to explain to them exactly what is going on with the debt ceiling, including what it means. I could not answer intelligently or in a way they could understand so I performed a little research.
What is the debt ceiling?
In simple terms, it’s exactly as it sounds. It’s the maximum limit the government is allowed to be in debt. Currently, it’s at $14.3 trillion and when August 2 comes along, the government will not be allowed to accrue more debt, meaning no more borrowing money. The government basically takes on debt by borrowing money from itself through social security and payroll taxes, among other means. It also borrows money from investors by issuing Treasury bonds.
Isn’t deficit and debt the same thing?
The two are very similar to each other. Deficit is the difference between spending and revenue. When the spending is higher than the revenue, you have deficit. Just like any other budgeting, when you spend more than you earn, you have to borrow money. When you have to borrow money, you have debt. Last year, the deficit was $1.29 trillion.
What happens if the debt ceiling is not raised?
Just like personal budgeting, if my expenses is higher than my total income, and the bank will not approve me of any additional loan, the next step would be to cut my expenses. I would probably try to live more frugally and cut my expenses anywhere and everywhere it is possible. If the government does not increase the debt ceiling and not be allowed to borrow any additional money, the next step for them would be to cut expenses so that the deficit would at the minimum be net zero. To cut expenses, the government will have to not pay benefits such as social security, cut military wages, or even cut government jobs. Interest rates will probably skyrocket and all this will lead to a financial panic not just across the nation, but throughout the world.
The bottom line is that the consequences of not raising the debt ceiling is too astronomical for the government not to agree to do so. They have been in meeting all weekend and will come to a conclusion any moment now. Let’s just wait and see what happens.
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I hope not. I actually want to see what will happen if debt ceiling is not raised. Instantly we’ll get balanced budget hehehehe… We can short the crap out of stocks and be filthy rich.
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