As of Monday, May 16, the U.S. government had officially reached the $14.294 trillion debt ceiling, a fact which served as yet another reminder for leaders in Washington to hasten negotiations associated with correcting the country’s debt crisis. However, Republicans and Democrats still remain deadlocked over a solution to address America’s escalating fiscal troubles. Moreover, discussions surrounding whether or not to increase the country’s debt ceiling seemed only to further political debate among lawmakers.
For most Americans, this news raises some basic questions: “What is the debt ceiling?” and “What impact does it have on my life and on the future of my small business?” This is a significant and complex topic, the effects of which are speculative at best. However, as with any multifaceted topic, there are key facts to understand and evaluate in order to determine potential impact.
The debt ceiling is essentially a predetermined cap set by Congress on the amount of money the federal government is allowed to legally borrow. It applies to debt owed to the public, as well as debt owed to the government programs such as Social Security
. While the debt ceiling is meant to serve as a way to help Congress control spending, it is currently being used as a means by which to avoid government shutdown. In other words, the U.S. government is borrowing money in order to offset the difference between the amount of money it spends and the amount it brings in. As such, the borrowed money is used primarily to fund government programs and pay creditors. Keeping this thought in mind, if Congress decides against raising the debt ceiling, the U.S. Treasury
would no longer have the authority to borrow money, leaving the government unable to pay the country’s bills.
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Consider for a moment that you own a boutique clothing store. You have reached the borrowing limit assigned by the lending institution used to finance your business and are now unable to borrow funds, which you have been using as a means to pay several of your bills. You are pleading with your lender to raise your loan limit, while simultaneously scrambling to make minimum payments to your creditors in an effort keep the business afloat. Unfortunately, business is slow, and your current rate of spending grossly outweighs your current rate of income. Given this fact, you are in danger of defaulting on your loans and aren’t left with too many options to stay in business. You take what little money you have and pay your store’s mortgage, but due to lack of funds, you’re unable to pay the store’s utility bill, your employees and the like. In order to offset expenses, you drastically increase the price of goods in your store but incur an even greater sales slump as a result of the price hike. Even if your lending institution decides to raise your loan limit, thus allowing you to continue to pay your bills in the short-term, you are still left with a long list of serious financial shortfalls. While this analogy is simplistic (and depressing) in form, it does help to paint a picture of the consequences associated with borrowing far more than one can repay. Much like the owner of the clothing boutique, the U.S. government is at risk of being left without the financial means to fund vital programs, pay its employees, etc.
To that end, it is clear that America is teetering on the edge of a financial cliff and about to suffer the wrath of repercussions from years of uncontrolled government spending. However, while raising the debt ceiling will allow the government to fund programs in the short term, breaching it would almost certainly lead to increased inflation, higher interest rates and continued economic decline. Conversely, should lawmakers fail to raise the debt ceiling this year, they would be forced to do one of two things: 1) Considerably raise taxes and cut spending; or 2) Default on some of the country’s financial obligations. Either option carries with it considerable economic consequences, including soaring interest rates, which would only further cripple the borrowing power of America’s small business community.
Regardless, there is no easy fix to the country’s escalating financial problems. Small businesses, large businesses and individuals alike will undoubtedly feel the impact of the government’s plan for fiscal reform. As a society, we have slipped into a mindset of entitlement, one in which we hold ourselves less and less accountable for our actions. What happened to core American values like sacrifice, hard work and perseverance? We have reached a point where we are literally robbing Peter to pay Paul and need to make a concerted effort (as individuals and as a country) to tighten our financial purse strings and get things back on track. One of the best ways to mitigate fall-out associated with any debt crisis involves a renewed commitment to budget management. Create a plan for financial reform and stick to it.
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