Via LearnVest By Gabrielle Karol ~
Tick, tock. Tick, tock.
The country hit its debt limit on December 31, 2012–which means that the government may not be able to make payments on its debts soon. Around the same time, the automatic spending cuts (the ones that were supposed to be triggered by the fiscal cliff at the new year) will kick in.
If the past is any indication, Congress will likely prove unable to deal with these deadlines in a timely fashion–and if they fail to deal with them altogether, the possible outcomes could include a recession, volatile stock markets and a crushing blow to our country’s financial reputation. And even if we’re spared all of this, Congress likely won’t reach a decision quickly … or without a major partisan battle.
Why? Well, only Congress—not the president—has the ability to raise the debt ceiling limit, which is the cap on authorized borrowing that the government is allowed to make. The president has said that he will not negotiate over the need to raise the borrowing limit, which is currently set at $16.4 trillion. He also vehemently believes that the fiscal cliff spending cuts should not be tied to this issue, but a Republican-controlled House of Representatives will likely try to pass a bill that raises the limit only if cuts are made to programs like Social Security and Medicare.
So, once again, we are facing the kind of partisan warfare and brinkmanship that caused extreme market volatility and led Standard & Poor’s to downgrade our country’s credit rating in the summer of 2011. Additionally, higher interest rates related to the battle–due to the fact that the U.S. was seen as a riskier borrower–have cost the U.S. over $18 billion.
Moody’s, another credit rating agency, has already said that political sparring could cause them to downgrade their own rating for the country—regardless of whether we actually end up defaulting. Summing up the scenario nicely, a managing director of an economics forecasting firm told The New York Times: “This is kind of a mess.”
How Exactly Did We Get Here?
Why is the wealthiest nation in the world in debt? The answer is pretty much the same as why anybody gets into debt: The U.S. is spending more—on programs like Social Security and Medicare, the military, salaries that are covered by the government, etc.—than it’s taking in from taxes.
And as we all know by now, getting Republicans and Democrats to agree on spending cuts and tax increases is a difficult task … so the country is forced into debt. While the government has already hit the $16.4 trillion limit, Treasury Secretary Timothy Geithner has been able to move money around in order to pay the government’s urgent bills.
How Can We Solve This Crisis?
There are a number of creative solutions that are being tossed around that could potentially end this fiasco before the final hour:
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