The National Debt Nears Its Ceiling

The Treasury Department recently reported that the United States debt is dangerously close to reaching its self-imposed limit of $12.1 trillion dollars. Currently, we are only $211 billion shy of reaching the ceiling with an increase rate of nearly $3.8 billion per day. What is the Treasury going to do?

The Debt Ceiling Will Likely be Raised

Most likely, the way that lawmakers will resolve the issue is by simply raising the debt ceiling. According to recent Standard & Poor’s data, this has already been accomplished 76 times since 1960 and will likely be done again before the debt reaches its self-imposed ceiling, possibly in Nov. 2009.

What Happens If the Ceiling Isn’t Raised?

If lawmakers don’t raise the ceiling before it is penetrated, the government will be forced to shut down. While this has occurred in the past without devastating results, there are still potential downfalls. One is that the value of the U.S. dollar will likely plummet, which could affect portfolios worldwide. Also, the Treasury might have to pull off some impressive tricks to come up with money. A few options include:

  • Government securities: There is $113 billion available in government securities that are held in a 401k-type plan for federal employees (funds would need to be repaid with interest).
  • Government dollar holdings: The Treasury can sell $16 billion in government dollar holds that are held in a currency stabilization fund.
  • Fannie Mae and Freddie Mac debt: The Treasury also has the option to sell $165 billion worth of debt from these organizations.

What This Means for You

As already mentioned, not raising the debt ceiling can weaken the dollar. However, raising the ceiling sends the United States further into debt, which can result in higher taxes, reduced benefits and federal aid programs, as well as higher interest rates on home loans and more.

At this point, are hands are tied either way. So for now, all we can do is wait out the storm, hope the economy gets better, and find ways to save money while preparing for an uncertain future.

How do you feel about the nation’s growing debt?