The government shutdown is to the debt ceiling threat as political squabbling is to political suicide. I mean no disrespect to the many individuals who are negatively impacted by the shutdown—you are being unjustly abused like the single shovel in a sandbox argument—but I can only muster so much sympathy for the campers holed-up outside of the Grand Canyon waiting to begin their rafting trip. All of us, however, and the full faith and credit of the world’s currency reserve nation, are being held hostage in a high stakes game of political chicken regarding the newly dubbed Debt Ceiling Debacle of 2013.
Okay, now I’ll drop the SAT logic, metaphors and hyperbole to explain the fundamental differences between the government shutdown and the debt ceiling threat, the two dominant news headlines of the day:
The government shutdown occurred because of disagreements in Congress over the proposed budget for the coming (now current) fiscal year, beginning on October 1, 2013. It’s as if you and your spouse can’t agree on how your household income should be spent. We haven’t actually had a budget passed by Congress for years, but continuing resolutions were passed each time the moment of truth arrived [read can kicking] to maintain the levels of preceding budgets. This time, they didn’t agree on a continuing resolution.
The resulting government shutdown has a very meaningful and noticeable impact for those working directly for the government, doing contract work for the government or availing themselves of government resources. Non-essential government employees are furloughed, but have been promised back pay. Many government contractors are also idle and are not expected to receive pay for time off. As for the many government services—from federally subsidized mortgages to national parks—USA Today did a good job answering 66 questions about the shutdown on October 1, and followed up with another 27 a day later. If you’d prefer a more visual and humorous description of what precipitated the shutdown, check out The Atlantic’s explanation—in Legos.
In short, the government shutdown may not show DC’s best side and is an annoyance to those of us not receiving the government services that come out of our paychecks, but it’s likely to be forgotten a couple days after it’s over. The same can’t be said regarding the debt ceiling issue.
The debt ceiling issue is not a direct consequence of the government shutdown, although it certainly is tangentially related to our inability to pass balanced budgets that actually take in the amount of income required to pay all of the government’s bills. Since we spend more than we make as a country, we must go further into debt to meet our expenses. The debt ceiling, then, is our credit limit set by Congress, which currently stands at $17.3 trillion (with a “t”). It’s the equivalent of you maxing out your credit cards and going back to the credit card company asking for an increase of your limit.
We’ve had a debt ceiling in place since 1917, but Congress has continually raised it. “Since 1960,” writes Mark Koba at CNBC, “Congress has acted 78 times to permanently raise, temporarily extend or revise the definition of the debt limit—49 times under Republican presidents and 29 times under Democrats.”
The biggest threat if we sail through October 17th without an agreement, when it is estimated that the U.S. Treasury will run out of necessary funding and lack the power to borrow anything more, is that our worldwide creditworthiness would come seriously into question, which could precipitate a demotion from our long-standing as the world’s currency reserve.
What does that mean? Currently, international business is conducted in U.S. dollars. When foreign countries buy oil, soy beans or steel, their currencies are exchanged into dollars to complete the transaction. This has given the U.S. dollar more strength than it likely deserves, as foreign countries stockpile our cash to spend as needed.
Not raising the debt ceiling at this time could even mean not paying interest to those who hold our U.S. debt obligations the world over—for the first time. Ever. The corresponding lack of confidence in our political process and uncertainty of our financial capabilities could very well pull us back into the recession that many feel like we haven’t left yet, and the longer-term implications are even worse.
Worst of all? We—you and I—can’t do anything about it. Unless, that is, any of our elected representatives are checking their Twitter accounts as they sit with arms folded, legs crossed and brows furrowed. In that case, consider tweeting this post—they might just receive an education.
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I’m a speaker, author, Head of Wealth Management for Triad Financial Advisors. Connect with me on Twitter and LinkedIn.