Written By: Matt Jaskolka, Financial Advisor

As if the U.S. economy and the world as a whole did not have enough to be concerned about in the near-term, we now have the U.S. government’s debt ceiling to add to the mix. Treasury Secretary Janet Yellen said recently that the U.S. will start using so-called “extraordinary measures” to keep the U.S. from defaulting on its debt obligations. In today’s article, I want to focus on what the debt ceiling is, why it is important, the possible ramifications for your money, and how Carlson Financial can help. 

By definition, the debt ceiling is the legal limit on the total amount of Federal debt the government can accrue. To simplify the legislative process of approving debt issuance, the debt ceiling was first enacted in 1917 and was set at $11.5 billion. Debt issuance is an approach used by both the government and public companies to raise funds by selling bonds to external investors.

Fast forward more than 100 years and today’s debt ceiling is $31.381 trillion which includes roughly $24.5 trillion of debt held by the public and roughly $6.9 trillion the government owes itself as a result of borrowing from various government accounts, like the Social Security and Medicare trust funds. In part, because the U.S. normally runs a budget deficit, the debt ceiling continues to be pushed against and adjusted. 

The debt ceiling is important for several reasons. First, it is intended to protect us from default. The U.S. has never defaulted on its debt before. In 2011 when House Republicans refused to pass a debt ceiling increase, the threat of default prompted rating agency Standard & Poor’s to downgrade the U.S. debt rating from AAA to AA+. The sturdiness of U.S. credit has global implications since domestic and international markets depend on the relative economic and political stability of the U.S. economy. Second, once the debt reaches the $31.381 trillion ceiling, the U.S. government would not be able to issue any new debt. Therefore, the federal government would have to default on many of its obligations at least temporarily, including Social Security payments and salaries for Federal civilian employees, the military, and veterans’ benefits, among others. 

Forcing the U.S. into default on any of its obligations could be catastrophic for an economy that is already teetering on entering a recession. Further, it would likely cause a downgrade to the ratings on all U.S. securities which would have a cascading effect going forward, including exponentially increasing interest rates on debt issued in the future. If a default occurred, there would be no money for critical programs. Funding for Social Security would be exhausted, causing our senior citizens to lose one of – if not their only – source of income. Civil service and military families would feel the pain as well, as their benefits would be severely impacted. State programs that are normally funded by the Federal system would be devastated. As you can see, nobody wins. 

Neither political party wants to be seen as the party who stopped paychecks to taxpayers. It is imperative that they reach an agreement before this issue escalates further. If you are concerned about how the debt ceiling might impact your finances, we are here to help.

Say What?

Paleontologists in central India have made a rare discovery of bowling-ball sized eggs in a fossilized dinosaur hatchery made up of 92 nests and 256 eggs, giving scientists today some clues into nesting behavior among prehistoric species. 

This week in history

1887 – Groundhog Day was celebrated for the first time in Punxsutawney, Pennsylvania. (And Groundhog Day, the movie starting Billy Murray and Andie MacDowell … is 30 years old this year.)

1933 (90 years ago) – “The Lone Ranger” makes its radio debut on a Detroit radio station, featuring the William Tell Overture and a shout of “Hi-ho Silver, Away!”

1936 – The first class of the Baseball Hall of Fame was elected: Ty Cobb, Babe Ruth, Honus Wagner, Christy Matthewson, and Walter Johnson.

1964 – Hasbro launches action figure GI Joe following the successful release of the Barbie Doll in 1959.

If you have any questions, we’d love to chat! Call us at 844-CARLSON (844-227-5766) today!