As baseball philosopher Yogi Berra might say, it’s like deja vu all over again. Congress is preparing for a showdown over the national debt ceiling, there are concerns over a potential government shutdown, and average Americans are left wondering what all the caterwauling in Washington, D.C., has to do with them.
But while the debate might seem like nothing more than political infighting and posturing between insufferable adversaries, another threat over a government shutdown does have consequences for Joe Sixpack and Suzy Soccer Mom. And it does provide an opportunity to offer sound financial advice for typical households.
Consternation over the debt ceiling has became an all-too-frequent occurrence in Washington. Since 2000, Congress has raised the debt limit 14 times. It did so 21 times during the 1980s, and seven times during the 1990s. Which naturally brings up the question: Why even have a debt ceiling if they are just going to keep raising it. With the national debt at about $17 trillion, this is an obvious concern. Who wouldn’t like to simply raise their family debt ceiling when necessary?
But there are some misnomers regarding the federal debt ceiling. Namely, it doesn’t allow for additional government spending; it simply authorizes the feds to pay obligations already incurred. As historian Joseph Thorndike noted, refusing to raise the debt ceiling is, “not like cutting up your credit cards. It’s like cutting up your credit card bills.”
Because of that, a government shutdown would prevent the feds from sending out checks to which it already has committed, such as salary for military personnel and Social Security payments. Defaulting on those obligations could, experts say, cause the stock market to drop, damage the federal government’s credit rating and lead to higher interest rates, and result in inflation. In other words, it would have an impact on the homefront.
Which means this is a good time to reiterate some of the basics of personal finance. As suggested by LexingtonLaw.com, average Americans should:
• Save money.
• Pay off debt quickly.
• Stop charging unnecessary items.
This is sound advice at any time. Excessive individual borrowing — as demonstrated by the housing crisis a few years back — can destabilize the entire economy.
As for Congress, while this cat-and-mouse game of raising the national debt ceiling has become a common occurrence, this time around might be a little different. The House of Representatives has voted to defund the Affordable Care Act — Obamacare — in exchange for avoiding a government shutdown. There’s no telling how the strategy will play out, or how it will be received by the American public.
But sooner or later, Congress will raise the ceiling this time around, and sooner or later down the road it will be faced with doing so again. One thing is certain — a system that accrues a $17 trillion debt is not sustainable. For that, one solution that has gained some traction was put forth by financier Warren Buffett.
“I can end the deficit in five minutes,” Buffett said earlier this year during an appearance on CNBC. “You just pass a law that says that anytime there’s a deficit of more than 3 percent of GDP (Gross Domestic Product), all sitting members of Congress are ineligible for re-election.”
There’s not time to put the plan into action during the latest budget crisis, but at some point the federal government must alter the way in which it goes about its business.
