The Debt Ceiling Crisis in Everyday English

By Sarah Winfrey on 29 July 2011 (Updated 1 August 2011) 2 comments
Photo: ttarasiuk

If you’re like most Americans, you’ve heard more than you ever wanted to hear about the debt ceiling crisis. However, hearing is different from understanding, and this is a complex problem that can be difficult to grasp. In this case, it's been even harder to get an accurate explanation about what is going on in language that’s easy to understand. After all, if you’re not an economist or a financier, it’s easy to wonder what the big deal is, anyway.

This week, I had the chance to talk to FOX Business Network reporter Shibani Joshi to see if she could shed some light on this situation and what it means for everyday Americans. She’s been following the story closely for weeks now and was eager to help Wise Bread readers gain a deeper understanding of the debt crisis. (See also: Debt Ceiling Contingency Plans)

What Is the Debt Crisis All About?

Basically, the country is running out of money. As of next Tuesday, August 2nd, the country will no longer be able to borrow more money because it will already have borrowed the maximum amount allowed under current laws. While this may not have a huge effect immediately (since the country does have other sources of income), if not resolved it means that, eventually, the U.S. will not be able to pay its bills. This includes payments owed on the money we’ve already borrowed, as well as veteran’s benefits, Social Security, Medicare and Medicaid, and more.

The government’s problem is similar to the problems that, on a smaller level, caused the recession. Joshi puts it this way, “In the same way we saw Americans living outside of their means by taking out too much credit to buy bigger homes than they could afford and maxing out their credit cards, the U.S. government uses too much credit. This is a magnified example of what happened to millions of Americans in the last decade.”

Is it a Big Deal?

According to Joshi, this is a significant problem. “If the U.S. can’t pay its bills,” she says, “it defaults on its loans and then the entire world will be impacted.” Many countries look to the United States as a financial leader, even during a recession. If we cannot meet our financial responsibilities, this will trickle down to effect people worldwide.

Not raising the debt ceiling will not only effect people around the world financially, but in other ways, too. “We are the most stable nation in the world, and the beacon that the world looks to for security,” Joshi says. If we are proven to be less secure than we appear, that will effect how other countries interact with us and could, eventually, lead to shifts in power around the globe.

Should You Panic?

Not yet. The August 2nd deadline isn’t hard and fast, except that we cannot borrow more money after that date. However, “we still have cash coming into the government, and the government will be able to pay its bills for a short time after August 2nd,” Joshi explains. This means that there is more time and space for lawmakers to agree on a plan than is being touted in many news sources.

In addition, Joshi stresses that “this is sometimes just how the system works. An outcome will be reached. It may not be fun or pretty, but it is how our system works.” She believes that, while lawmakers may hold out until the very last minute, they are not willing to sacrifice the well-being of the country they serve and the rest of the world for a few partisan ideals.

If We Don’t Raise the Debt Ceiling, How Does It Affect Average Americans?

The most significant place that average Americans will see an effect from this crisis is in the value of their investments. The Dow has fallen nearly 500 points during the last week because of the disagreements in Washington on this issue. “That is your money,” Joshi explains, “in retirement funds, college funds, and more.” It’s expected that interest rates will also rise, which means that mortgage, auto loan, and credit card rates will go up, too. The prices of certain commodities, like oil and gold, are also expected to rise. “This could affect your grocery bills and the price at the pump,” Joshi says, which hits every American where it counts.

Beyond that, Americans who rely on money from the government may be put in very difficult situations. If the country cannot provide that depended-upon income, these individuals and families could face serious financial difficulty.

However, it’s also important to note that we don’t know exactly what will happen. We’ve never defaulted on loans before, nor have we had a lowered credit rating. So for the moment, all of this is speculation.

ARTICLE CONTINUES BELOW

What Can Every American Do in Regards to this Crisis?

1. Don’t panic. Give the government a bit more time to figure things out.

2. Get educated. Before you decide what you think about this issue, learn more about it. The information in this article is a bare-bones explanation. If you want to know more, continue researching until you feel like you understand what’s going on. Then, and only then, decide how you think it should be resolved.

3. Take action. When you know how you’d like to see the situation handled, contact your federal representatives to let them know. You can call, email, write, or Tweet your opinions. Talk to friends and family members, too. After all, many Americans still don’t understand the issue very well.

4. Be open to compromise. Issues as complex as these almost always require conversation and concessions on all sides before they’re resolved. Instead of insisting that your solution is correct, dialogue with others and try to come to a mutual understanding, just like we all want our representatives to do right now.

5. Be open to change. This country needs to operate on a balanced budget that doesn’t involve burgeoning debt, and that means that things cannot continue the way they are. “We have major issues to deal with that go beyond the debt ceiling,” Joshi says, “including a huge spending problem, entitlements that are dysfunctional, and a tax code that could use a house cleaning.” Making things better means change, and it will be easier if we all see it coming.

Shibani Joshi joined FOX Business Network (FBN) in September 2007 as a reporter. To her role, Joshi brings experience in investment banking, strategy and business development. Joshi began her career as an investment banking analyst at Morgan Stanley, where she worked on merger, acquisition, and corporate finance deals in the real estate sector.

Joshi holds an MBA degree from Harvard Business School. She also earned a bachelor’s degree in finance and accounting at the University of Oklahoma. Joshi is a native of Oklahoma City and her parents are originally from Pune, India. FOX Business Network will be airing a special report on the debt crisis on Monday, August 1 at 5AM/ET, where you can hear more of her thoughts and explanations on the current issues.  

3.375
Average: 3.4 (8 votes)
Your rating: None
ShareThis

comments

2 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Guest

r.e. “We have major issues to deal with that go beyond the debt ceiling,” Joshi says, “including a huge spending problem, entitlements that are dysfunctional, and a tax code that could use a house cleaning.”

If we want to continue to live in a growth-based economy, then I fail to understand the meme that spending is a problem. In fact, I believe that it could be argued that LACK of spending is what is causes growth to falter (and when businesses and households on the aggregate are not spending, encouraging government spending on real goods, such as transportation and communications infrastructure, could actually be a very constructive response).

One of my biggest fears is that in the process of making government small enough to drown in the bathtub (as Grover Norquist so elegantly puts it), we may drown just about everything else that most of us value first.

If you look at who the national debt is actually owed to, there are several eye openers. One of which is the reminder that the social security program, far from being a bunch of red ink on the government ledger, has been a major lender to the federal government (i.e., it is one of the major debtors to which the government owes money). The government has made a practice of borrowing from this program, so the idea that it is a big leak causing the ship to go down is actually backwards -- it's more akin to a big wad of fat that has been keeping a ship that might have gone down much sooner afloat.

Getting rid of social security might really mean cutting more deeply into national defense (which is where most government revenue goes), or homeland security, or infrastructure spending (think transportation, communications, and utilities), or other things that most of us take for granted (in addition to causing Joe American to have to pick up the tab for groceries, medications, utility bills, etc. for the aging Americans in his family and his church).

I wouldn't argue with the idea that the tax code needs a house cleaning.

Guest's picture
Guest

I would like to comment on point 5. It's a revenue problem. With a 9+ percent unemployment, jobs being shipped overseas, large corporations (e.g. Walmart, Target, Home Depot, etc.) paying their employees low wages, and these same corporations not paying their fair share of taxes, there is less money for everyday Americans and less money in the economy. In addition, the Bush tax cuts (which was supposed to create jobs and did not) is giving us less revenue. Granted, there is a spending problem. It's called the Iraq and Afghanistan wars. Blaming all the problems on Medicare, Medicaid, and Social Security is a weak argument at best.