This week, a reader sent me an email asking why not raising the debt ceiling would be a bad idea. This obviously is a very hot topic right now with Congressmen fighting in Washington every day on the subject of the debt ceiling. I’m not a big fan of politics, but I wanted to point out a few of the repercussions that we all could see in the near to mid-term if our elected officials fail to act by the August 2nd deadline.
1. If the debt ceiling is not raise, the US will technically be in default of some of its loans, its bonds. The negative implications of defaulting will have far reaching aspects. It will amount to more than just the Chinese government, who own $268 billion of US government debt, not receiving their investments back. A default would hurt everyone and be felt in the pockets of every American as well. Many politicians are discussing a stop-gap measure that will prevent a default temporarily and the US Treasury said that other bills will go unpaid in an effort not to default on US bonds. But, debt rating agencies such as Moody’s have already mentioned that a short-term fix may still result in a downgrade of US bonds which will still have very negative effects in the market.
2. There are many bond funds in America that have stipulations from their investors and boards of directors that they cannot own bonds of a country or institution that has defaulted. Many will be forced to automatically sell those US government bonds. With the flood of bonds entering the market, prices will drop in order to find buyers for so many government bonds.
3. Bond prices and interest rates are inversely related. So, if bond prices fall, interest rates will rise. Bond interest rates, as most of us know, help determine the prices of other financial instruments such as the interest we pay on our car loans and mortgages. Our borrowing costs will increase as a result of bond rates rising.
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4. The value of the US dollar will tank versus every other currency in the world. It will become more expensive for importers to do business. Everything that we purchase from overseas manufacturers will be more expensive because the value of the dollar will fall. Think about how you would feel or react if the price of everything on the shelf of our stores went up overnight?
I know that the idea of increasing the limit on how much our country can borrow is not a popular one. I don’t want to be in debt, and I don’t want our country to be seriously in debt either. But, unfortunately, sticking our heads in the sand and refusing to confront the situation is not a viable option either as you can see by some of the repercussions that are listed above. We cannot continue to kick the can down the road for another generation to address later.
If you have a money question, email it to me at email@example.com. If I choose your question for a future blog post or video, I’ll send you a free copy of Dave Ramsey’s book, The Total Money Makeover.