Make Ends Meet: Debt ceiling deal impact

Make Ends Meet: Debt ceiling deal impact
Published: May. 23, 2023 at 9:40 PM EDT
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LOUISVILLE, Ky. (WAVE) - President Biden and House Speaker Kevin McCarthy continue their debt ceiling negotiations.

The two met as the U.S. is potentially days away from defaulting on its debt for the first time.

Treasury Secretary Janet Yellen said it is “highly likely” the Treasury will be able to pay the country’s bills by June 1 if a deal is not reached.

Both the president and house speaker are optimistic they can reach a deal before that deadline. If both sides agree to a deal, it still must get through a divided Congress.

The U.S. has never defaulted on its debt before. In 2011 just hours before a government default the debt ceiling was raised, but there was still damage done.

Getting so close to the edge of default and all the uncertainty surrounding the issue led to the first-ever downgrade of the U.S. government’s credit rating by Standard & Poor’s.

The problems that came from the drop in the U.S. credit rating caused considerable problems, so many are asking today what will it mean for their family if a deal is not reached.

Marcus Warren, financial planner, investment adviser, and founder and owner of Warren Wealth Management & Tax Planning is passionate about making financial concepts easy to understand.

”The Debt ceiling is basically the maximum amount of money that the government can borrow to pay its bills,” explained Warren. “When you have a credit card, you generally have a max limit, and after you hit that max limit then you generally can’t spend any more money to pay for things, pay for bills.”

As the American government gets very close to that max limit, the bills keep coming in and money is needed to keep the nation operating.

“They always go back to their credit card company, and they say, ‘Hey credit card company,’” Warren explained. “And they say, ‘Hey can I get an increase in the amount I’m allowed to borrow?’”

The U.S. does not deal with American Express, Discover or Capital One. Trying to get an increased credit limit may be an easier task.

”In this case, it’s Congress,” Warren explained.

Congress regularly suspends or raises the debt limit so the U.S. can borrow more. But lawmakers are at an impasse, meaning the government could default on its debt as soon as June 1, according to Treasury Secretary Janet Yellen.

“All these countries, they buy our debt, they buy our government bonds that we issue and that’s basically them loaning us money,” shared Warren.

Individual investors, institutions, and foreign governments buy U.S. treasury bonds.

“All countries issue bonds, but we are the safest bet because we have the best credit rating for paying back that bond,” exclaimed Warren.

That would change if we defaulted on our debt. Like the average American citizen who defaults on a debt, America’s credit score would change. America’s default would also hurt Americans.

”Interest rates can tend to go up, there’s volatility in the stock market and the most important thing when we hit that debt limit is we happen to default on our current debts a lot of payments won’t go out because we’re not able to take any more money in or borrow any more money,” proclaimed Warren.

A list of some of the monthly obligations that may not be met if we do not meet the debt ceiling: Social Security benefits, Medicare benefits, pay or benefits for active-duty military members, civil service, and military retirees.

“This may seem like something far away in Washington, but it has a direct impact and can have a direct impact at your home in your pocketbook in your household,” Warren said.

According to the Department of Treasury, Congress has raised, extended, or revised the debt limit 78 separate times since 1960. 49 times were under Republican presidents and 29 were under Democratic presidents.