What Lies Beyond the U.S. Debt Ceiling

For a lot of Americans, maxing out credit limits is a last resort; a means of trying to stay afloat during tough economic times. Creditors put a cap on how much consumers can borrow to limit their risk, and the financial difficulties people find themselves in when they max out their credit.

As it happens, the same thing applies to the U.S. Government; and they’ve reached their limit. Now, you’d hope that a $14 trillion debt ceiling would be ample, but it turns out it wasn’t. As of Monday, May 15th we’ve officially reached the legal credit limit.

Some Background
Congress first imposed a debt ceiling, a limit to how much the government can borrow, as far back as 1917. The idea was to impose some limitations on the Treasury Department (the folks that issue debt like T-Bills, Bonds and Notes) so they didn’t spend indiscriminately.

The concept may have been a sound one, unfortunately when the cap is reached, as it was on Monday, there is the potential for the government to default on their obligations. Needless to say, this would cause havoc for financial markets across the globe.

The Impact
Though the potential impact is devastating, believe it or not consumers should see minimal changes, and most expect there won’t be much for us to worry about all. The reason is that, unfortunately, hitting the debt ceiling was expected by most and we’ve been down this path before. There’s little panic in large part because there is still time to do what the government generally does when this happens, simply increase the limit.

With over two months before the government will default, most people are of the opinion congress will get moving on raising the limit, freeing the Treasury to seek more debt to satisfy its obligations. With this in mind, the dollar has remained pretty stable, which should keep inflation in check. This would be one of the first, and quickest, impacts consumers would feel. As the dollar weakens inflation rises, meaning we’d get less bang for our buck.

Summary
If congress continues to sit on their collective hands as we move forward into summer, inching closer to D-Day, which is August 2nd in this case, circumstances will most certainly change. But for now at least, so far, so good.