Contributed by Patricia G.
A debt ceiling is the maximum amount the government can owe. Since we as a country hit this limit a few months ago, the government needed Congress to authorize the Treasury Department to borrow more money. If the United States defaulted on any of its loans, it would have a significant impact on the world economy.
The government’s budget works the same as an individual household’s budget. There is the income which is derived from taxes, how much it spends such as public schools, parks, medicare and how much it borrows in the form of bonds sold to individuals and foreign countries.
If the US government defaulted on these bonds, it would damage the country’s image of having one of the safest government bonds in the world – and therefore one of the safest governments.
The AAA rating has made the U.S. Treasury bond one of the world’s safest investments — and has helped the nation borrow at extraordinarily cheap rates to finance its government operations, including two wars and an expensive social safety net for retirees. Treasury bonds have also been a stalwart of stability amid the economic upheaval of the past few years. The nation has had a AAA rating for 70 years.
Despite the enactment of the debt ceiling at the 11th hour, Standard & Poor’s, the country’s major credit rating agency, dropped the US credit rating from an AAA rating (the top rating) to an AA+ rating. Standard & Poor’s said it lowered the nation’s credit rating because political leaders have yet to develop a credible plan to reduce the nation’s $14 trillion debt.
So what does this all mean at the local and personal level?
According to The Washington Post, analysts say that, over time, the downgrade could push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans. A downgrade could also have a cascading series of effects on states and localities, including nearly all of those in the Washington metro area. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads and parks.
Further, the stimulus packages we have been receiving annually could be affected. In addition, public services like social security and medicare/medicaid might be cut substantially. With this information, it is more important than ever to save aggressively in a 401 (k) or an IRA and to have the best health insurance you can.
What are your feelings about the debt ceiling crisis?