Financial Perspectives: Evaluating the debt ceiling

 

If you watch the news you hear a lot of debate about the nation’s debt ceiling. For those that may not be familiar with this issue, it has to do with the total amount of debt our country has outstanding.

By law, Congress has to vote to increase the debt ceiling to allow us to continue to borrow. You may ask yourself, why do we need to borrow so much? For years we have been spending more than we take in. In order the make ends meet, the government sells Treasury bonds. China has been the largest purchaser of our bonds for years. At this point, we have more than $14 trillion outstanding.

Our politicians are very aware that we cannot continue to spend money that we do not have. We need to begin making some very hard choices soon to help ensure that the programs we have today (Medicare, Medicaid and Social Security) will be available for our children and grandchildren.

The trouble is that while these issues are being addressed (and I legitimately believe they are) the business of government has to continue. We are still involved in two wars – Iraq and Afghanistan —  as well as dropping bombs in Libya. Our seniors still need to have their medical bills processed and paid as well as receive their Social Security checks. There are also numerous other government services that would shut down as well if the debt ceiling is not raised.

Some Republicans are trying to use this issue as an opportunity to leverage the Democrats and President Obama to make some significant spending concessions. Over the past few weeks, this played out in a wild process whereby Congress ultimately agreed to some significant cuts in the budget for the remainder of this fiscal year.

Whatever side of the fence you are on, the government must continue to operate. We cannot let the politicians hold us hostage while they bicker about the position they stand for. You see, Congress will still get paid even if the government shuts down.

The short-term solution must include an increase in the debt ceiling followed by significant changes like those recommended by the president’s National Commission on Fiscal Responsibility. The president put this commission together shortly after he took office and unfortunately, he has chosen to ignore the commission’s recommendations.

The longer we take to implement these types of changes, the more risk we are assuming. Up to this point, the United States has maintained a “AAA” credit rating. If things continue to go on as they are now, it is inevitable that our credit rating will be reduced.

Just the fear of this resulted in the stock market dropping more than 200 points last Monday, April 18. A reduction in this rating would result in countries around the world selling our bonds out of fear. The impact of something like this could be catastrophic for our economy. Not only would it result in a government shutdown, the market would fall dramatically which would affect all of us.

We have to continue to hope that our Congressmen and Senators can make muster up the courage to make these difficult decisions even if it results in them not getting re-elected.

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.  Family Wealth Services, LLC and Cambridge are not affiliated.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security. These situations are hypothetical in nature and do not represent a specific client.

 

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