The FYI… on The Debt Ceiling & Default

The FYI… on The Debt Ceiling & Default

1) What is the Debt Ceiling?

Created by Congress in 1917, the Debt Ceiling is a legal limitation on how much the government can borrow to pay the country’s debt. Today, the cap is set at $16.699 Trillion (yes… with a “T”)!

2) Why Do We Have It?

The Debt Ceiling was put in place essentially to help Congress control spending… not that it’s worked. Many say that it is unnecessary and that Congress should just authorize debt limit increases at the same time that they pass bills concerning spending and taxes, since they affect deficits.

3) So We Have Until 10/17 to Raise the Debt Ceiling. What Happens if We Don’t?

No one knows for sure. But most likely, the government runs out of money with which it pays the country’s bills. By the way, it’s been raised 78 times since 1960.

4) What Happens if The Government Runs Out of Money to Pay Bills?

That depends. Most likely, the government will have to prioritize where the money it does have goes. Predictions of this scenario run the gamut from “Armageddon” to “no real effect”.

Ultimately, if not dealt with correctly, the U.S. could default on its bonds, which would likely cause markets to significantly drop and interest rates to soar, and foreign investors to withdraw funds or sell US equities, which would also hurt the market.

5) Wait a Minute… What Happens to My Money?

The bad news is that the effect on the market and interest rates could cause some trouble with personal portfolios and loans. The good news is that, for the most part, your bank accounts and wallet will be mostly unaffected.

Economist Kristin Bentz, Executive Director at the PMG Venture Group, says that despite all of the talk on the news channels, most people don’t know or care what the Debt Ceiling is, so there won’t be a run on banks. Besides, those accounts are protected by the FDIC insurance.

“One of the questions you have to ask yourself is what you would do with the money if you took it out of the bank. Just about every type of investment may be vulnerable to market disruptions if the U.S. government defaults, so it's hard to see where a safe harbor would be.”

“So, as nerve-wracking as it may be, the safest thing is probably just waiting out the debt-ceiling standoff by keeping your money in the bank. Make sure your money is fully protected by FDIC insurance by keeping your deposits within the insurance limit. That limit is $250,000 per depositor per bank.”

However, Bentz adds “It will effect consumer confidence. And that will be the kiss of death. When this is all over and theses furloughed workers (from the government shutdown) get paid, we will see a nice bounce in Q1.”


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