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Understanding the US Debt Ceiling: How It Affects Everyday Americans (July, 2023)

Dr. Shi Zuo, Ph.D. Economics, M.S. Finance

© International Foundation for World Freedom


Introduction

Ever wondered about the US debt ceiling and how it can impact your life? Well, the debt ceiling, in short, is a spending limit set for the government. But when the ceiling is reached, things can get complicated, not only for the government, but also for everyday Americans. In this article, we'll break it down for you, explaining what the debt ceiling really means and how it can affect you and me.


What is debt ceiling?

As government often have to spend more than it takes in, government needs to borrow money to pay its bills, including social securities and medicare benefits, tax refunds, military salaries, etc.

Debt ceiling is total amount of money that U.S. government is allowed to borrow to pay its bills, to make sure things don't get out of control. But if the debt amount keeps increasing, the ceiling will be hit sooner or later. So what happens when government hits the debt ceiling? Let’s find out.


Consequences of Hitting the Debt Ceiling

  1. Government shutdown: Hitting the debt ceiling can increase the likelihood of a government shutdown if the debt ceiling is not promptly raised or suspended and the government exhausts its extraordinary measures to continue funding its operations. That means certain parts of the government reduce its operation (if not stop working), affecting things like national parks, nnvironmental and food Inspection, air travel, Smithsonian museums, etc.

  2. Delayed Payments: Hitting the debt ceiling can also cause delays in payments from the government. This includes things like Social Security benefits, military salaries, tax refunds, and payments to contractors. Therefore, individuals and businesses who rely on that money would have a difficult time in such situation.

  3. Tumbling Stock Market: The uncertainty surrounding the debt ceiling can create a bumpy ride in the stock market. Investors may become unsure about the asset they hold at hands and would rather sell the stocks in exchange for cash, causing the market to become unstable. This volatility can affect everyone’s retirement savings and investment portfolios.

  4. Higher Borrowing Costs: When we reach the debt ceiling, it can make investors nervous. The chances that government might default would lead an increase in Treasury bill rates and in turn leading to overall higher borrowing costs. And by overall higher borrowing costs, it could be things like mortgages, credit cards, and student loans become more expensive for us regular folks.

  5. Credit Rating Concerns: If we don't raise the debt ceiling on time, it can damage the US government's credit rating. That means lenders might think twice before lending money to the government. And when the government's credit rating goes down, (similar to the mechanisms mentioned above) it can indirectly impact our borrowing costs for things like loans and credit cards.


One thing about the economics and financial market is that, often times, it is about confidence and expectation. So item 3 to 5 above might still happen even when debt ceiling has not yet officially reached but people can feel the tension of it because they heard from the news that White House and Congress leaders are having a marathon debate over it and don’t have a solution in mind to raise the limit. For the same reason, such expectation can lead to less spending and investing, which can slow down the economy and affect our lives in various ways.


Additional Resources

Of course, all we have covered till now should just be referred as “Debt Ceiling 101”. There are so many fruitful resources out there for those who want to gain more understanding or even become an expert in the area. For example, this recent report published by White House gives a more detailed economics impact analysis breaking down different scenarios of debt ceiling. This commentary by Brookings Institute deeps dive into the topic from the perspective of think tank or researchers advising to policy makers. This ABC news coverage focuses more on the impact of debt ceiling on you and me, such as social security, unemployment, medicare, food stamps, etc. Last but not least, if you are still eager to learn more on this topic, some books like White House Burning: Our National Debt and Why It Matters to You could be a nice one to start with.


Conclusion

Even though it sounds like a complicated public economics topic, U.S. debt ceiling can affect everyday American in various ways. It is essential for us to understand how it would affect us, from government shutdown to financial market turbulences. It’s more than crucial for this country’s leaders from both parties to find responsible solutions to minimize the negative impacts of debt ceiling hits on everyday Americans, including you and me.



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