What The Debt Ceiling Debate Means To Your Financial Future


The clock is ticking.

If President Obama and congressional leaders don’t reach an agreement to increase the $14.3 trillion debt ceiling by August 2 then the United States will wind up becoming a deadbeat nation unable to meet its obligations for the first time in history. A number of leading economists and policymakers, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, warn that the U.S. would face nothing less than a “huge financial calamity” far greater than the meltdown of 2008.

Washington officials have become increasingly concerned that the nation is headed for crisis. And with good reason. In a recent interview with CBS News, the president maintains he cannot guarantee that 70 million checks will be delivered to social security beneficiaries, veterans, folks on disability and the like come August 3. And Moody’s Investors Service announced on Wednesday it has put the AAA credit rating of the U.S. government on review for a possible downgrade based on the likelihood the debt limit will not be raised by next month’s deadline.

The president is once again involved in talks with the GOP that can only be characterized as hostage negotiations. In December 2010, he was forced to extend the Bush tax cuts for wealthy Americans for two years as a means of avoiding a middle-class tax increase that could have derailed economic recovery and extending unemployment benefits set to expire for millions. To avert a government shutdown in April, Obama and congressional leaders reached a historic, last-minute deal  to slash about $38 billion in federal spending. Over the past week the president has taken a give-and-take posture with a recalcitrant Republican leadership opposed to tax hikes and big government. The GOP’s stance has been driven by the increasingly influential Tea Party caucus in the House.

Obama has rejected short-term solutions though. After clashing with House Majority Leader Eric Cantor (R-Virginia), who sought to to make a tactical delay with his proposal for an extension, the president maintained there was too much “positioning, posturing and catering” to lawmakers’ political bases. When he left Wednesday’s meeting, he said, “Enough is enough. ” He then gave lawmakers a Friday deadline to agree on a resolution.

The reality is that the talks have been mired in politics as the 2012 presidential contest heats up.  In a CNN interview, Massachusetts Gov. Deval Patrick says that “the Radical Right will let the economy fall off a cliff to stop President Obama.”

As this high-stakes drama continues to play out, we cannot afford to be oblivious to what this byzantine Beltway activity means for the nation’s economic health as well as our financial well-being. Here’s how we got here: Similar to your management of household finances, when the government spends more than it takes in that gap between spending and taxes represents  the budget deficit. Over the past decade, the size of the deficit has swelled due to several factors including significant revenue reduction related to the enactment of the original Bush tax cuts and last year’s extension; costs associated with the Iraq and Afghanistan wars; increased expenses for Medicare and Medicaid; and our government’s response to the Great Recession, which boosted stimulus spending and expanded safety-net programs like unemployment benefits.

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