Since there seems to be so many problems with the economy right now, I thought I’d address it with a new economy post. As many of you are already aware, the US has reached its debt limit (or very close to reaching it). As a result, they are currently trying to raise the debt limit ceiling so they can still afford to pay some money back and not default. The current debt ceiling limit in the US is $14.3 trillion. But what is the debt ceiling?
“If the Treasury does not collect enough in revenue to pay for expenditures by the Federal Government, it may be authorized by Congress to issue debt (in other words, borrow money) to pay for the federal budget deficit. Prior to 1917, Congress had to authorize each round of borrowing directly. In 1917, in order to provide more flexibility to finance the United States’ involvement in World War I, the Congress instituted the concept of “debt ceiling”. Since then, the Treasury can only borrow money as long as the total debt (excepting some small special classes) does not exceed a ceiling stated by law…
…A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office explains, “the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.”[12] The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.[13][14]
…The debt ceiling has been raised 74 times since March 1962,[15] including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times to date under Barack Obama…
…”The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the US Government can’t pay its own bills,” Obama said before a March 16, 2006, vote on raising the debt limit. The Senate narrowly approved raising the limit along partisan lines, 52–48, with all Democrats opposed.”
Source: Wikipedia: Debt Ceiling Crisis
So as we can all see, raising the debt ceiling is not anything new. But the economy is getting worse and worse now due to the massive borrowing of fiat currency so many people are opposed to raising the debt ceiling further, even though this would mean drastic changes not only to the US, but also on a more global scale. The problem is that the US has too much debt already and letting them borrow more is a sure fire recipe for disaster. The world around us is changing immensely; never in my life have I seen so many people without jobs, so much competition for even the most basic of jobs, inflation so out of control that my grocery bill gets bigger every time I buy food (even though I buy the same things each time). Further, the stock market and mutual funds have performed so badly in the last 5 to 10 years that people end up pulling out less money than they put in (if anything at all), the US is running out of money to continue with pension plans and many seniors are unable to retire as a result, and even if they could retire their money would be worth less and less each year due to rising inflation. And this is happening now while the “recession” is declared over? Even if they do raise the debt ceiling, they will have reach again in just a short time and be forced to raise it again and again. Eventually, they won’t be able to raise it anymore and the US will default as a result.
“A default occurs when the government does not have enough funds to meet any of its legally mandated fiscal obligations, including paying interest on its existing debts, federal employee salaries, tax refunds, and Social Security and Medicare payments. A default could potentially wreck the government’s credit rating, lower demand for U.S. assets, deprive federal workers of their salaries, and deny Social Security benefits to retirees, potentially triggering a wide-reaching economic crisis.”
Source: The Fiscal Times: What is the Debt Ceiling?
So what does this mean for you? If the US government defaults, life as we know it in the US will change drastically. Unemployment will rise, social programs such as Medicare and pension plans will be a thing of the past, inflation will soar and your currency will be worth less and less. When people have no work now, they can still go on employment insurance from the government, but if the government defaults, this service might also be cut. If this happens, people will revert back to the basics of life, cutting out all extra expenses just so they can survive. No more days at the spa and buying new cars; there will be a rush into food (and therefore agriculture), precious metals to trade (since currency may be worth next to nothing as it was in the hyperinflation of Germany in 1923.
“After the United States Treasury exhausts alternate methods of funding (projected on August 2, 2011), the Treasury will have to choose which obligations to pay and which obligations not to pay with the income from tax revenues and other sources.[34] As an example, satisfying existing interest payments to bondholders, Medicare payments, Social Security payments, unemployment insurance and defense contractors would leave no remaining funds to pay active duty military, federal workers, taxpayers due refunds and many other obligations generally considered essential…
…In January 2011, Treasury Secretary Timothy Geithner warned “failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades.”
Source: Wikipedia: Debt Ceiling Crisis
Of course this won’t happen right away. At first things will just slowly go downhill as more and more people get laid off and the employment insurance runs out. Many services may eventually get cut one by one as the US government struggles further with cutting back expenses.
They can only keep raising the debt limit so many times. Even if they raise it again on August 2, 2011, it’s only going to be a matter of time before they need to raise it again and again. Eventually the consequences will catch up to them and the US will have to deal with the decisions it has made over the years regarding its economy and its debt. I urge you to not put your faith in the government and hope that they will save you. Save yourself instead by protecting your purchasing power. As a possible default is looming, many people are buying into precious metals as a safe haven and as a result, gold and silver are shooting up to record highs. Since this is a precious metal and therefore a limited resource, it is running out and won’t be available forever. In this volatile, world-wide economy, gold and silver are increasingly popular options that investors are choosing to diversify their portfolios. Protect yourself; instead of buying stocks, bonds or GIC’s, put your money into something that will work with you through this difficult time, instead of working against you by robbing you of your money through inflation. For more information on these precious metals, check out a previous post of mine How to Invest in Gold and Silver. To look into buying silver or gold, click here.
