Debt Ceiling Fight Takes Center Stage: What It Means For You

If debt limit isn't raised, interest rates would surge and markets would crash.

April 11, 2011, 6:03 PM

April 12, 2011— -- The battle over whether to raise the federal debt ceiling is being fought in Washington, D.C., but its ripple effects will be felt throughout the country and beyond U.S. shores, economists warn.

Raising the debt ceiling is similar to raising the limit on an individual's credit card. The United States' debt ceiling has been set at $14.294 trillion, a limit that Treasury Secretary Tim Geithner estimates will be reached by around May 16.

If the United States' debt does reach that limit, lawmakers have to raise the ceiling to ensure that the government can keep borrowing more money.

The United States owes debt to foreign investors, pension funds and various government programs.

If the debt ceiling isn't raised, the United States won't be able to borrow any more money. The Treasury does have emergency contingency plans in place that would avoid the country defaulting until July 8, but the economic consequences of implementing those plans would still hurt the U.S. economy, administration officials say.

The functions of the United States government would be severely hampered if it cannot borrow funds, some argue. Like an individual in debt who is unable to borrow any more money, the United States would default on its loans, its credit rating would take a blow and it would not be able to get money from high-value investors.

Federal Reserve Chairman Ben S. Bernanke has said the consequences of such an event would be catastrophic to Americans, no matter how far removed they are from Washington.

Interest rates would surge considerably, hurting an already fledgling mortgage market, and would continue to soar.

Stock markets would crash, and the dollar's value would decline sharply, making it more expensive for U.S. businesses to purchase goods and products from abroad, and hurting international-bound travelers.

Markets would lose faith in U.S. Treasuries, putting future investment at risk and hurting U.S. businesses.

Economists predict that it could lead to another worldwide financial crash and a long recession.

The United States has never defaulted on its debt, and lawmakers responsible for raising the debt limit are fully aware of the perilous consequences of not doing so.

"Just like households have personal obligations that they have to meet, the federal government needs to meet its obligations as well. I think that not raising the debt limit would have serious, very serious implications for the worldwide economy and jobs here in America," House Speaker John Boehner, R-Ohio, said Monday. "But having said that, we're just not going to do the typical Washington thing, roll over, increase the debt limit, without addressing the underlying problems."

Boehner is expected to face heavy resistance from some members of his own caucus, especially freshman members and Tea Party supporters, who say raising the debt limit continually is irresponsible.

The Republican leadership itself won't make the move without a fight. They say they want to see more leadership from President Obama in how to confront the debt crisis and the key issue of scaling back entitlement reforms, an issue that the president is expected to address Wednesday in his speech at the George Washington University.

Lawmakers will likely go down to the wire over the hotly contested topic of whether the debt ceiling should be raised, but experts predict that in the end, it will happen -- even if requires haggling with some lawmakers who are adamantly against it.

Debt Ceiling: What if it's Not Raised?

It's not just the issue of whether the limit would be raised, but the debate itself that could have negative consequences, say many economists.

"We have difficulty solving our domestic problems, so this weakens the leadership position of the United States. It's hard to be a leader if you can't keep your house in order," said Allan Meltzer, an economist and professor of political economy at Carnegie Mellon University. "You tell other people what they should do but you don't do it yourself, it doesn't work."

"We've seen over and over again that whenever there was a crisis, investors ran to the United States and that didn't happen in last year," he added. "They went elsewhere -- to the Euro, to the Yen -- that's a sign of what the future will look like if we aren't able to solve this problem."

The fight between Democrats and Republicans over how to tackle the long-term debt issue will be a tough one. While many lawmakers argue -- as do Tea Party groups -- that spending has to be reduced, doing so what entail cutting cherished programs like Medicare, Medicaid and Social Security that may end up hurting Republicans in the next election.

Democrats have already seized on Rep. Paul Ryan's 2012 budget proposal as one that would harm the elderly and the poor.

Some argue that the United States needs to deal with entitlement programs today, before its too late, even though cutting Medicare and Social Security may be hard to swallow.

"It's going to be more painful if they do it later," Meltzer said.

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