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Breaking It Down: The Debt Crisis

It’s causing panic in the political hemisphere and big words are being tossed around. But what does all this debt crisis and debt ceiling mean to you? Does it really matter? Here’s everything you need to know about the current debt crisis and how big man politics could impact you.

So a debt ceiling isn’t the roof over my head…is it?

Just like people, our country is in debt. Like a gazillion dollars in debt. A debt ceiling, properly known as the debt limit, is how much gross debt the federal goverment can have. Our current limit is $14.3 trillion, which the government exceeded on May 16, 2011.  This basically put the U.S. Treasury in a tizzy and the know have until August 2 to lift the debt ceiling. (Raising the ceiling just means to write into law the new limit). A failure for Congress to pass an adequate bill would result in the country’s first default.

But they’ve raised it before…right?

The first limit was created by the government in 1917 in order for the country to issue bonds during WWI. In fact, that’s how the country incurs debt, through the selling of bonds, which is basically an IOU with interest. Legislators have raised the debt 74 times since 1962. The last time it was raised was in February 2010–the limit was expanded by an extra $1.9 trillion.

What happens if they don’t do anything about it? 

A default would occur. This means that the government doesn’t have enough funds to meet or essentially “pay back” all the debts owed through its legally mandated fiscal obligations (so that means your neighbor’s FBI salary, that tax refund check your parents get in May, your grandparents Social Security, and that student grant could go bye-bye). Remember those “good credit report” ads you see on television. What happens when you have bad credit? Well, the U.S. Treasury won’t be allowed to borrow any more money, which is what the country does to pay for financial transactions. More importantly, a default would harm the government’s credit rating and lower demand for U.S. assets, making the dollar weaker and potentially creating a chaotic economic mess.

The only two options after this would be to either cut spending or raise taxes by billions of dollars to make it to the end of the fiscal year in Sept. 30. Both options would be crippling to the American people.

So the deals are?

It’s come down to a political battle for the debt crisis, power weilding between to plans proposed by Senate Majority Leader Harry Reid and House Speaker John Boehner.

Boehner has a two-step deal. The House believes there should be a two-stage increase in the debt ceiling, the first one being worth $900 billion to help cover the Treasury Department’s borrowing needs through early 2012. On the other hand, Reid and Senate members believe that the deal can be handled with a one-shot plot. His plan is to increase the debt ceiling by $2.7 trillion all at once in exchange for a $2.2 trillion in debt reduction. Both bills have caps on discretionary spending which is the money that the government uses to pay for defense and to run government agencies and programs.

Watch a video explainer of the debt crisis debate:

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