Cartoon by Steve Breen, Townhall.com, April 15, 2011
The U.S. economy has gone through its share of ups and downs in the past few years– many more downs than ups, of course. In the latest economic struggle, lawmakers are negotiating ways to avoid default after the national debt ceiling was reached in May.
Immediately after the ceiling was reached, Treasury Secretary Tim Geithner warned lawmakers that he would only be able to hold off default until Aug. 2. This gave Congress approximately 11 weeks to come up with a debt plan that would either raise the ceiling, reduce the amount owed or both.
Now, roughly two weeks remain with no agreements from lawmakers. So as the very real possibility of another financial crisis looms, we must get ready because, like it or not, the debt ceiling countdown has begun.
What Is the Current U.S. Debt Ceiling?
You have probably already heard that the U.S. reached the debt ceiling, which was surpassed on May 16, 2011. As of Feb. 2010, the ceiling was set at $14.3 trillion, which means this was the maximum the U.S. was allowed to borrow from its creditors.
Once that limit was reached, lawmakers became responsible for figuring out how to ensure the nation didn’t default on that debt. Back in May, it seemed like 11 weeks was more than enough time for members of Congress to decide how to do just that, but as the clock ticks closer to the default deadline, many are beginning to wonder whether they can actually pull it off.
Why It Isn’t as Simple as Raising the Debt Ceiling
Shortly after the national debt reached $14.3 trillion, there were discussions in Congress regarding raising debt ceiling. One proposal to increase the limit by $2.4 trillion was promptly rejected in the House of Representatives on June 1. Some say this was a way to send a message that Congress would refuse to increase the federal borrowing limit unless it was linked to a deficit-reduction plan.
Since that time, there have been continuous debates between lawmakers who want to raise taxes and those who want to make major budget cuts to programs like Medicare and Medicaid.
Recently, President Barack Obama issued a couple of warnings meant to push lawmakers into action before default occurs. He first issued a deadline of July 22 to agree upon a debt reduction plan that he could sign into law. Then he went a step further by stating Social Security recipients and others who collect government benefits checks wouldn’t receive their money in August if the nation defaults.
His attempts have undoubtedly resulted in an uproar from American citizens who believe default is unnecessary and would devastate the nation. Credit rating agencies have revealed a similar sentiment.
Debt Ceiling 101: How Default Could Affect You
U.S. Credit Rating in Jeopardy of Losing AAA Status
Even before the debt ceiling was reached, credit agencies began issuing warnings that the United States could lose its AAA rating. The first to issue this warning was Standard & Poor’s. In April, it warned the outlook on America’s stellar debt rating had dropped from stable to negative.
This didn’t mean the rating had actually dropped, but that there was a 33 percent chance it could fall into the negative category within the next two years.
After the ceiling was reached, Moody’s Investors Service issued its own warning, stating the U.S. could lose its AAA credit rating from the service if Congress didn’t find a way to raise the nation’s debt limit soon.
Both agencies have acknowledged the problems that just one missed payment could cause for the country. Moody’s, in particular, said missing a payment means there’s not just a possibility, but a probability that the nation’s credit rating would drop.
It noted the reason for the drop would be partially because of default, but more so because the default could have been avoided if lawmakers had chosen to set their political issues aside to do what’s best for the country.
Will the U.S. Avoid Default?
The million-dollar question is will the U.S. avoid default? Congress has had several weeks to decide on a debt plan, yet it’s still undecided. As the clock ticks toward default with no real resolution in sight, the possibility becomes more real by the day.
So what could happen if the nation defaults on its debts? Experts offer mixed information on the consequences of default. Some say interest rates could increase and our AAA ratings would be lost.
But some paint an even grimmer picture of the repercussions of default. Some have claimed that failing to either raise the debt limit or come up with a deficit-reduction plan would be catastrophic to the U.S. and result in one of the worst financial crises in history.
According to the International Monetary Fund, default would send “a severe shock to the economy and world financial markets.” Thousands of businesses would have to file for bankruptcy and millions could lose their jobs almost overnight.
Everyone watching Congress act on this issue hopes that lawmakers can come to a reasonable debt ceiling vote once and for all. It would be inconceivable to think that another financial crisis can be sparked when it is totally avoidable.