PoliticsBusinessDebt CeilingPolitics

Debt Ceiling: What Happens If It Isn't Raised?

10 Ways The Debt Ceiling Affects You
By 

Social News Editor, Huffington Post

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Does all this talk of debt ceilings make your eyes glaze over? You know it has something to do with bonds and defaulting, but that's about it. You want to know what it all means and, perhaps more importantly, how this affects you.

The debt limit is the total amount of money the U.S. government is allowed to borrow to pay all of its existing bills, from paychecks for federal employees to interest payments on the national debt. On Monday, May 16, the U.S. hit the debt ceiling -- in other words, it borrowed all the money it is currently allowed to borrow. Treasury Secretary Timothy Geithner told Congress the government can continue to pay its debts until about August 2 by using "extraordinary measures," such as tapping into the pension funds of federal employees.

In the past, when the U.S. reached the debt ceiling, Congress voted to raise, extend or redefine the debt limit. Now the White House wants the debt limit raised again. Congressional Republicans mostly agree that the debt ceiling needs to be raised but have said they will not vote to do so unless it is accompanied by major spending cuts and long-term debt reduction.

So, for the sake of argument, let's say the debt ceiling isn't raised. The U.S. will then have to decide which expenses and debts to pay and which can wait. If the U.S. starts defaulting on (i.e. not paying) its debt, that's not just a problem for the entities that won't get paid -- it will affect the global marketplace and all of us who use it.

So far, the market doesn't believe the U.S. will actually fail to raise the debt limit. The evidence for this disbelief is everywhere: Interest rates are still low, there's high demand for U.S. debt, the stock market is stable, banks are lending to companies and to each other.

But what if the market's wrong? Here's a breakdown of what could happen if the debt ceiling isn't raised by August 2 -- and how it could affect you.

10 Ways Not Raising The Debt Ceiling Could Affect You
The Stock Market Takes A Dive(01 of10)
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If the U.S. starts defaulting on its debt, everybody who owns U.S. stocks and bonds will take a big hit. This will affect the big banks, corporations and even countries -- pushing some toward bankruptcy. That's the kind of slide that can spark a panic. On a more personal note, your 401(k) and/or pension will suffer big losses. It could take a long time to rebuild those funds, delaying retirement -- or making it impossible. (credit:AP)
You Can't Buy Stuff(02 of10)
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Because the global banking system has such a big stake in U.S. assets and the dollar, it will essentially grind to a halt until the U.S. raises the debt limit. At that point, our usual ways of purchasing things -- including credit and loans -- will be unavailable. You can get and use cash, but it will essentially be Monopoly money for a while, due to hyperinflation. (credit:AP)
Business And Consumer Lending Stops(03 of10)
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With the global banking system in free-fall, nobody will be lending money for a while. You can't make big-ticket purchases (like a car or college education). And companies that have lost all their U.S. assets won't be able to get loans to cover their day-to-day operations if the commercial paper market -- where companies lend each other money overnight -- seizes up. (credit:AP)
Unemployment Goes Up (04 of10)
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When businesses and corporations lose their money and can't get a loan to function, they have to cut somewhere -- and that somewhere could be you. In other cases, planned expansions and new hires might be pushed back, slowing down economic progress. (credit:AP)
Interest And Credit Card Rates Dramatically Increase(05 of10)
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When the banking system does get back on track, it will still be more expensive and difficult for business owners, the government and regular people to borrow money or buy goods on credit. That drives up the cost of our debt, both personal and the one the government owns. When interest rates go up, the value of bonds you hold in your 401(k) goes down.
Payments To Military Servicemembers Are Delayed Or Stopped(06 of10)
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Treasury Secretary Tim Geithner warned congressional leaders that failure to raise the debt limit could stop, limit or delay military payments. "This would cause severe hardship to American families," he said, "and raise questions about our ability to defend our national security interests."
Social Security Cash Crunch(07 of10)
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Those who rely on Social Security to pay their bills may well need to rely on family or government assistance (if it's still available) to get by. Social Security has a multi-trillion-dollar trust fund that ensures it will be able to pay out benefits for decades. But that trust fund is invested in special Treasury bonds, which will almost certainly plummet in value if the U.S. starts defaulting on other debts. The result could be a major cash crunch for seniors.
Traveling Abroad Becomes Difficult(08 of10)
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As the value of the dollar drops here in the U.S., it will become virtually worthless in other countries. If you're planning a vacation or business travel outside the U.S., it's going to get a lot more expensive. (credit:AP)
Medicare Bills Go Unpaid(09 of10)
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If the federal government fails to pay the bills associated with Medicare, then hospitals, doctors and other medical service providers will not be paid. This could drive up the costs of health care -- and make it less available to those in need.
America Is Labeled As A Deadbeat(10 of10)
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If the U.S. stops paying its bills, the rest of the world will get pretty upset. Even after debt repayment eventually restarts, China and Europe will be wary of lending more money to America -- and when they do, it will be at much higher rates. (credit:AP)

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