How the Debt Ceiling Saga Affects Consumers

NEW YORK (MainStreet) — Nearly two months ago, the nation watched as lawmakers debated the fiscal cliff crisis and ultimately passed legislation to maintain the Bush-era tax rates for couples earning less than $450,000 per year and raise taxes on wealthier Americans.

You may remember that the tax issue was only one part of the fiscal cliff. The debt ceiling was the other side of the equation, since just before the start of 2013, the United States met its debt ceiling of $16.394 trillion — just like when consumers meet the credit limits on their credit cards during times of financial distress.

When the debt ceiling is met, the government needs to cut spending (with looming cuts referred to as the sequester) or raise the debt ceiling. This is the cornerstone of the debate that will only continue to heat up over the next few weeks. If the debt ceiling isn’t raised by March 1, government spending cuts occur, largely in the Department of Defense. Even though we officially met the ceiling Dec. 31, then-Treasury Secretary Timothy Geithner took measures to tide us over until early March.

The consequences of not raising the debt ceiling means the government can no longer pay its bills, and that has an impact on consumers.

“If the U.S. failed to pay its bills, the people who had expected to get U.S. cash would be out of luck. And the rest of the world would panic and demand immediate repayment of the remaining U.S. loans. This would lead to a spike in interest rates,” Babson College professor Peter Cohan says.

Interest rates on mortgages and credit cards would see an increase, since these rates are tied to the U.S. Treasury Yield Curve, which would rise after a sequester.

Higher interest rates means you’ll pay more money if you leave a balance on your credit card, if you’re in the market for a mortgage or if you have an adjustable-rate mortgage.

Not to mention the overall impact on our already flimsy economy, which is trying to stay afloat from the shocks of 2008.

“If we were confronted with 100% of the current estimate of the sequester, I suspect the economy would fall into recession pretty quickly,” says Gregory Miller, chief economist at SunTrust Bank.

“Air travel would find itself in tough shape, since the government pays air traffic controllers, and towns relying on military bases would be hurt,” he adds.

While the $16.4 trillion debt ceiling may seem like a frightening number, Miller reminds that the ceiling is arbitrary and largely a political tool.

“The debt ceiling can go as high as we want, but its impact on the underlying real economy is more a function of faith in U.S. credit. As long as people buy our debt, the amount of debt doesn’t really matter,” Miller says.

Given the severity of the sequester, it’s likely lawmakers will continue to raise the debt ceiling. Critics view this move as kicking the can down the road instead of getting government spending under control. Financial stability in Washington, at this point, is wishful thinking.

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