Why does Debt Ceiling/Limit need to be raised by August 3rd, 2011? and what could happen if its not raised?
We had a long discussion in the chat about this topic today & here is an easy way to understand the Debt Limit & what could happen if debt ceiing limit is not raised?
I was in the financing field before i did trading full time & came across many people that had to consider consolidation of debts or bankruptcy & seems this is a similar scenario but on a massive scale. Although there are some major differences I'll try to explain to those of you that don't understand the Debt Ceiling Problem and what it means in a simpler way.
- if the US were an individual with lines of credit, mortgages & credit card debts then they are getting maxed out & what they are trying to do is raise the line of credit so they can continue to pay bills.
- once they increase the line of credit (in US case 'debt limit/ceiling) " then what?
- If you raised your line of credit you'd still need to pay those bills so you have 2 options 1) get a higher paying job or more income 2) reduce your bills or 3) a combination of the two. There aren't too many other options available for someone that spends everything that comes in.
- If you as an individual miss your credit card payments then Visa/Mastercard can increase your interest on the amount of money you owe them. Also if your credit score is not good then will cost you more to borrow. This in a way would happen to the US since countries like China would not lend or would need more interest to keep lending the US $'s since there would be a higher rate of default.
- This is the one problem that Congress & Obama administration were debating this past weekend since they have the same issues 1) higher income 2 ) reduce bills — but in the US case see it has to either 1 ) raise taxes 2) reduce services or money that the Federal government pays out or 3) combination of the two
- That's as simple as it gets but deciding what if any taxes are raised & what services are cut is a problem not only affecting the US but we've seen it around the world in more extreme cases lately like Greece (they had few choices left so they are trying to do those 2 main things 1) raise taxes 2) cut costs but you may have heard it as "austerity measures" and that's why so people get upset since affects so many ( and never in a good way) You are going to get paid less & get less services from the government ( who would not be upset about that).
- Most are confident that the limit will be raised but puts more pressure on the US on how that debt will be paid & eventually there will be more pain to US citizens to get the massive debt under control – it can't be swept under the carpet . Unless some bold politicians come up with telling the public that this can't go on & to expect some pain – But those politicians would not get re-elected so that's why we are seeing so much politican chess games being played out.
- Hopefully this is not a band-aid solution and some tough decisions are agreed upon and does not just become a political mess.
- Politicians will likely wait till the last minute as they seem to do with other crisis situations.
The debt ceiling needs to be raised by about $2 trillion to get the U.S. government through the 2012 election based on the current rate of federal spending or would face a government shut down , higher interest rates & problems and …
“The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,” Geithner said
"Consider a recent report from the Bipartisan Policy Center. It says in the month of August, the Treasury has to make $306 billion in payments, but it will take in only $172 billion. Under one scenario, that's enough to pay interest on the debt, Social Security, Medicare and Medicaid, defense contractors and unemployment benefits. But there would be no money left for active duty military, federal workers, and a slew of other programs.Never before has raising the debt ceiling been so difficult. Congress has done it 102 times since 1917, and 10 times in the last decade. This time, Treasury says there is no room for a last minute deal.As negotiations drag on, credit-rating agencies have threatened to downgrade America's credit. If they do, that will increase the cost to borrow money, adding even more to the Federal debt."
interesting articles on what could happen if the debt limit is not raised and what services would be affected if a government shut down happened :
Updated Articles as of July 24, 2011 on Debt Ceiling
http://sg22.ly/riGkEc US Stock Futures Drop, Gold Up on No US Debt Deal
http://sg22.ly/nbAbkJ ‘Gang of Six’ Plan Derails Boehner-Obama Deal
http://sg22.ly/r8sr5K Gridlock for Debt Talks
Hope this helps you understand a bit clearer what this debt limit means & why needs to be raised but right now its more of a politican chess game. You can start to see that if Social Services , Military payments were delayed and if the US could not borrow the money it needs to function what that would do to the country. You would have a lot of upset people demonstrating ( probably not as violently as we've seen in Greece & other countries but if the problem got worse that would be a major concern going forward).
Again, even if the limit is raised the issue will come up again next year and how much more can the US raise the limit without 1) raising taxes 2) reducing costs?
Not sure what the balance will have to be but that is a politican one and eventually will affect all companies and individuals in one way or another.
Here's a toast to higher debt & lower taxes ( i think that's what the politicians are trying to do but seems a bit opposite of what they should be doing ..no? )
what does debt celing mean? ceiling
why does debt limit/celiing need to be raised
how much is debt ceiling?
how much does debt limit need to be raised?
why do we need a debt limt/limit ceiling ?
What happens if debt ceiling/limit is not raised?
will there be a US government shutdown?
why do we have a debt ceiling/limit ?