Tackling the Debt Ceiling; What it Means for Consumers and Businesses

July 29, 2011 (Press-News.org) For months, media outlets all across the country have been reporting on the nation's debt crisis. Consequently, "debt ceiling" has become a common household phrase. As Congress continues to discuss solutions, talks continue about the affects the nation's debt problem is having on consumers and businesses.

Congress has until August 2nd to come up with a solution. If they don't, disastrous consequences could result for the U.S. economy. Unfortunately, consumers and businesses alike, far removed from Capitol Hill, many not quite understand just how disastrous.

The Debt Crisis

In May of this year, U.S. citizens were told that the government had hit its debt ceiling of $14.3 trillion and can no longer borrow money. This essentially equates to the government maxing out its only credit card, and, just like any consumer who no longer has access to credit, spending comes to a halt. For the government, this is problematic considering it outspends incoming revenue by approximately $118 billion every single month.

So the U.S. government now has two options: either raise the debt ceiling or cut spending. Congressional opinion varies on just what option is the best decision for consumers, businesses and the U.S. economy.

Raising the Debt Ceiling

Advocates of raising the debt ceiling, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, say that if the debt ceiling is not increased, it could have a catastrophic effect on the U.S. economy.

Many businesses would no longer be able to secure necessarily loans; others that could secure loans would face high interest rates. Several other businesses could end up defaulting on their loans, file for bankruptcy protection, or end up going out of businesses--a dire consequence to the American economy since today there are over 29 million small businesses operating in the U.S.

Consumers would also be affected by a tightened credit market. Individuals with credit cards, loans or mortgages would see a hike in interest rates. Similarly, default, bankruptcy and foreclosure could potentially result, pushing the U.S. into another recession. The U.S. economy could easily revert back into a recession.

Opponents, however, say that raising the debt ceiling merely provides a short-term solution to the nation's economic problems and only intensifies an already unsustainable debt burden. Further, they argue that the option provides our legislators no incentive to balance the budget.

Cutting Spending

Rather than borrow more money, Congress is considering another option--spending cuts. Instead of raising the debt ceiling, some legislatives instead think government programs should be cut.

Currently, a majority of the government budget goes to pay for defense costs, Social Security, Medicare and Medicaid. Not surprisingly, Congress is considering cut-backs to these programs in particular.

However, slashing these vital programs could create additional problems. Retirees have long counted on the income provided by Social Security, and may have difficulty making ends meet if their benefits decrease. Cutting defense spending could lead to a loss of jobs, which could have a devastating impact on many local economies.

A Complicated Decision

This will not be an easy decision. In a poor economic climate where the unemployment rate is over 9 percent, foreclosure rates are at an all-time high, and more and more consumers are turning to bankruptcy, either option will be hard to swallow.

Article provided by Jacobowitz & Gubits LLP
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