How the Debt Ceiling Issue Will Hit Ordinary Americans in the WalletSubmitted by Katherine on Sat, 06/04/2011 - 21:45
How the government handles the nation's debt limit will directly affect our personal finances in all sorts of important ways. Every time we've bumped up against that ceiling in the past, the legislative branch has simply increased the nation's credit limit. Our problem right now is that the United States is only a few billion dollars from reaching its $14.294 trillion debt limit, and our elected officials aren't ready to pick the simplest choice, the one that past Congresses have made. This time, there's debate.
Should they raise the debt ceiling in order to borrow more money? Or do they hold the line and start either defaulting on our debts or stop paying for other government outlays? Do they cut federal spending, and if so, to which programs? Or do they raise taxes?
Yes, our taxes are tied to the debt ceiling. As long as our country is under its debt limit, it can easily borrow money by selling Treasury bonds. Given that the government currently only raises taxes to cover 60% of what it spends, being able to borrow means that the services people depend on from the government continue. If America hits its debt ceiling, that option would be off the table. In such a scenario, the
government would have to raise taxes to fund the shortfall, cut
services, reduce its payroll, or do all three.
As America inches toward its debt limit, bond rates start going up.
And the interest rates on our car loans, our mortgage loans, our student loans, and our credit cards, to name a few, are tied to bond rates. So if bond rates increase, the interest rates on our personal debt also go up.
And, as if increased taxes and higher interest rates aren't bad enough, we could also see increases in the cost of living, and decreases in the value of the dollar.