What Does the Debt Ceiling Mean to You?

By: Vidhi Piparia

 

The effects of the debt ceiling are most widely seen through an elongated government shutdown; however, the effects of no money to keep the country running or paying down the debt are slightly more nuanced. The debt ceiling is a cap on how much debt the U.S. can take on, and when the country reaches that debt limit, Congress has to negotiate whether to increase the debt ceiling or not. Without this increase, the government can’t borrow money to pay federal employees or pay the bills, therefore forcing a government shutdown.

However, the impacts of not raising the debt ceiling can go beyond just a government shutdown. Many people conjecture that its impact could cause a global catastrophe. Marcos Cabello writes in an article by CNET that the effects of not raising the debt ceiling “would be acute and widespread… the US GDP would decline, approximately 6 million jobs would be lost, and the unemployment rate would increase dramatically” (CNET, 2021). Although this widespread impact may not be intuitive, it is important to remember that the debt ceiling affects the U.S. at the macro level magnifying its impact to a large part of the economy.


Although the effects of not raising the debt ceiling are quite calculated at the global level, the same can’t be said for the impact on financial planning at a local level. Craig Slack, the Deputy Treasurer of Chicago, said that the investment portfolio created by the Chicago Treasurer's Office cannot be guided based on the unknown, in this case, the status of the debt ceiling. Similarly, Anthony Ryan, the Lead Commodity Options Market Maker for McLaughlin Capital and current investor, said that since a “government shutdown is temporary, my investments, which are long-term, are not as affected.”

It doesn’t seem like the national debt affects the local government or an individual investor much, so then why do we even have to pay off our debts? To explain this, we need the answer to the infamous question of who the U.S owes debt to? Most of the U.S.’s national debt is held by money managers, government entities, corporations, and individuals through their 401ks and pension funds (a fund that provides retirement income) within the country, while the rest of it is owed to foreign countries like China, Japan, and the United Kingdom (The Balance, 2021). Although the appropriate amount of debt is debated, there is some consensus on the idea that a substantial amount of debt will lead to economic turmoil.


With that said, the U.S. is around $30 trillion in debt, the highest it has ever been, and increased by 233% since 2008 (DataLab). So, although investors and treasury employees may not be too affected by the federal debt, we the youth are going to be the ones facing the consequences of this unsustainable trend. The government can keep printing money, but things are going to be expensive when today's youth are the ones running this nation. To quote Craig Slack again, “when inflation outpaces wage growth, it's the worst thing that we can have in our economy in my mind.” At the end of the day, it’s going to be up to the youth to decide whether they are more concerned about the effects of the debt ceiling not passing, or simply the fact that we are continuously having to increase it.