How the Debt Ceiling Issue Will Hit Ordinary Americans in the Wallet

National debt clockThe ongoing debate surrounding America's looming debt ceiling is big news inside the Beltway and in the press, but for many of us, even the phrase "debt ceiling" sounds too far removed from daily life to be of much interest. But ignoring this latest political battle would be a mistake: How the government handles the nation's debt limit will directly affect our personal finances in all sorts of important ways.

Before we dive into how all this could hit your wallet, here's a quick refresher course on the issue. Like every other country on Earth, America borrows money to pay for its services. But legally, there's a limit to how much money the federal government can borrow. Congress holds the purse strings: If more borrowing is needed, they have to approve it. Every time we've bumped up against that ceiling in the past, the legislative branch has simply increased the nation's credit limit.

Our problem right now is that the United States is only a few billion dollars from reaching its $14.294 trillion debt limit, and our elected officials aren't ready pick the simplest choice, the one that past Congresses have made. This time: There's debate. Should they raise the debt ceiling in order to borrow more money? Or do they hold the line and start either defaulting on our debts or stop paying for other government outlays -- military and civil service salaries, for example? Do they cut federal spending, and if so, to which programs? Or do they raise taxes?

Yes, our taxes are tied to the debt ceiling. As long as our country is under its debt limit, it can easily borrow money by selling Treasury bonds. As Stan Collender, a partner at Qorvis Communications, explains, "given that the government currently only raises taxes to cover 60% of what it spends, being able to borrow means that the services people depend on from the government continue." If America hits its debt ceiling, that option would be off the table. In such a scenario, the government would have to raise taxes to fund the shortfall, cut services, reduce its payroll, or do all three.

An Expensive Gamble on Many Levels

But individual Americans also will be directly affected by this when it comes to our own consumer debt. As noted before, America raises money by selling debt in the from of Treasury bonds, the government's version of an IOU. Someone -- you, me, China, my grandma, China, a college endowment, a hedge fund, China (yes, China buys a lot of them) -- purchases a T-bill, and the American government promises to redeem the bond at some later date, paying the buyer back with a bit of interest.

As long as bond buyers feel confident that America will always be willing and able to repay them, they tolerate low interest rates. Zero risk, small reward. But if the world starts to get nervous about America's ability to repay, the markets will demand a higher interest rate on our bonds before they're willing to buy them -- and because the nation relies on borrowing for cash flow even during good times, if Uncle Sam can't find buyers for those bonds at low rates, it will have to offer higher ones. Because it's our tax dollars that are used to pay that interest, higher interest rates eventually will have to covered by us in the form of higher taxes.

And what might make bond buyers edgy and demanding? The possibility that the government might default -- not pay all of its borrowers back -- which is precisely what could happen if we hit the debt ceiling.

So, America inches toward its debt limit, and bond rates start going up. The interest rates on our car loans, our mortgage loans, our student loans, and our credit cards, to name a few, are tied to bond rates. So if bond rates increase, the interest rates on our personal debt also goes up.

Beware of Falling Dollars

As if increased taxes and higher interest rates isn't bad enough, we could also see an increase in the cost of numerous everyday items, including gas, clothes, electronics, and anything else produced overseas. If the United States starts looking like it can't repay its debts, the value of the American dollar decreases. If the dollar weakens, foreign goods become more expensive.

This is, of course, all speculative at this point.

"We don't know what will happen because this hasn't happened before," says Collender. "But if the debt ceiling isn't raised and the government runs out of cash, at some point the president may decide he has to stop doing certain things, like paying government contractors, for example. That may not sound like such a big deal, but it is if someone in your family, or someone you know, is working for that contractor, or for the supplier of that contractor, or if that contractor is a big employer in your neighborhood or your state."

It also matters because all the parts of our economy are intricately intertwined, like a woven basket where each reed relies upon the next for support. Say the government postpones payments to a contractor. That contractor may decide to hold off on that new ad campaign it had planned to launch. Now, people working in the advertising industry, and maybe the newspapers and television channels that rely on advertising dollars, start to feel the pinch, and so those people decide to start saving more and spending less, in case the economy takes a downturn. Because consumers are now spending less money, stores start seeing a decrease in sales, and respond by reducing employees' hours or even engaging in outright layoffs. And it spirals downward from there.

None of this is very encouraging, which is all the more reason we need to stay alert to how our Congressional representatives handle the debt ceiling issue.

You can learn more about it at the government's TreasuryDirect website, which is surprisingly straightforward and even offers you the opportunity to "make a contribution to reduce the debt." Initially I thought that was funny, as it seems like such a mismatch to ask a single person to toss in a few bucks towards a multitrillion dollar debt. But then I realized it's not such a bad idea. After all, we have to start somewhere.

Loren Berlin is a columnist at She can be reached at (at) You can follow her on Twitter @LorenBerlin, and become a fan on Facebook.

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A loan is a financial transaction in which one party - the lender - agrees to give another party - the borrower a specific amount of money which must be paid back in full.

November 28 2013 at 2:20 AM Report abuse rate up rate down Reply

THIS COUNTRY IS S-P-E-N-T................................

July 19 2011 at 9:00 AM Report abuse rate up rate down Reply

LOOK WHAT BUSH DID! With No Complaints from Republicans, The Tea Party or Fox News!

On the day President Bush took office, the national debt stood at $5.727 trillion. The latest number from the Treasury Department shows the national debt now stands at more than $9.849 trillion. That's a 71.9 percent increase on Mr. Bush's watch.

September 29, 2008
It'll be the 7th TIME THE DEBT LIMIT has been raised during this administra­tion.

July 11 2011 at 11:06 AM Report abuse rate up rate down Reply
Ramona Ramirez

Why blame China for doing what any smart person would do. If they didn't buy them who would?
Your asses are supporting their economies every time one of your nerdy a$$es buys a wife from there. If they are supposedly the enemy than you are sleeping with the enemy dumba$s.

June 23 2011 at 6:03 PM Report abuse rate up rate down Reply

I do not like your contract.

June 11 2011 at 8:41 PM Report abuse rate up rate down Reply

I do not like your contract !!!!1

June 11 2011 at 8:38 PM Report abuse rate up rate down Reply

We are already feeling it, Obsama et al must go.

June 11 2011 at 5:46 PM Report abuse rate up rate down Reply

Has the U.S. dollar lost it's power, is the U.S. dollar's days numbered as remaining the world's reserve currency? Currency exchange in other countries are getting more difficult and even in America there are alternative currencies being accepted rather than the dollar. Have you ever heard of a currency called "Berkshares"? It's being used in western Massachusetts, and even in Texas many places are accepting Mexican pesos. I didn't realize that my dollar could be refused as payment for a purchase in a private store if that owner decided the dollar was no longer worth enough to him.
I guess it's a good thing I don't have a lot of dollars in the bank so when things get really bad I won't have lost much but what will I be able to make purchases with if my dollar is no good? Will our economy ever get that bad? I don't know, I suppose it depends on the other countries we owe so much money to like China to who we owe the most money. I believe China has said it wouldn't be in the United States best interest to default on payments to them, so I'd say we are between a rock and a hard place. It's a wait and see game we're playing and it doesn't look good.

June 09 2011 at 7:06 PM Report abuse rate up rate down Reply
1 reply to wenritahouse's comment

China alread owns us. Obsama must go.

June 11 2011 at 5:48 PM Report abuse rate up rate down Reply
Largo Lagg

Gee Loren, I was hoping I would be able to read about what happens if we just borrow, borrow, borrow. Can you write about that next?

June 08 2011 at 4:36 PM Report abuse rate up rate down Reply

So the net effect of all of this, is that overseas products will begin to cost more here in the US. Well, If products from overseas become more expensive, won't that mean that the products that the US makes ( or could make) will become more attractive to consumers? Isn't that what capitalism is all about? Yes, it is apparently out of balance, but the whole system is based on a natural balance over time. The trick is not to panic. We either trust our economic system or we do not. If we are to do anything it seems reasonable to slow the spending of our government before it has to self destruct. How about tying government spending to the GNP for the next 100 years and lets stop arguing over it all. Gives me a head ache.

June 08 2011 at 12:41 PM Report abuse rate up rate down Reply