News about the debt ceiling has been non-stop lately. With the impending dead-line of August 2nd quickly approaching, many Americans are scratching their heads without a clear understanding of exactly what it means.
The debt ceiling is like a credit card limit. Once you reach your credit card limit, you have reached the maximum you can charge, and are in trouble if you need to spend more. The debt ceiling for the United States is currently $14.3 Trillion. The U.S. Treasury has borrowed only enough money to pay all its debts through August 2nd. The U.S. ‘credit card’ will officially be maxed-out in a few short weeks.
Here are a few possible scenarios if the August 2nd date comes and the debt ceiling isn’t raised:
• The U.S. dollar will suffer hyper-inflation since its value will be severely devalued.
• Loans of any kind will be hard to get, and hold huge interest rates.
• Raising interest rates will make the value of bonds held in 401Ks go down.
There are many politicians who have no doubt that the debt ceiling will be raised, but fear that if they agree to it, they will have constituents back home who will punish them by withholding votes at election time.
Mitch McConnell, Senate Minority leader (Rep.-Kentucky) said in a recent interview, "I refuse to help Barack Obama get re-elected by marching Republicans into a position where we have co-ownership of a bad economy," he said.
As a result of trying to distance themselves from Obama, Republicans drafted a “back-up plan” which would allow Obama to raise the debt ceiling without any Republican support.
Republicans, united in their determination to only raise the debt limit with fiscal reform, have insisted on massive spending cuts in exchange for their votes.
"If these debt negotiations have convinced us of anything, it's that we can't leave it to politicians in Washington to make the difficult decisions they need to get our fiscal house in order," said McConnell. "The balanced budget amendment will do that for them."
We shall see.