July 27, 2011

The Federal Debt Ceiling: What Is It and Why Should You Care?

Do you remember the four-year period between 1998 and 2001 when the U.S. government pocketed a budget surplus of $559 billion, according to the Congressional Budget Office? By contrast, in the four years between 2007 and 2010, our government racked up a budget deficit of $3.3 trillion. That's no misprint - it's trillions of dollars!

The multi-trillion dollar deficits we've incurred in the last few years have maxed out the government's credit limit.

Just like you and I have a limit on our credit cards, the government, by law, has a maximum amount it can borrow. This maximum amount it can borrow is called the debt ceiling.

The U.S. is one of the few countries where the government imposes a debt ceiling. As a result, if we continue having annual budget deficits, then every few years, Congress has to authorize an increase in the debt ceiling so the government can pay its ongoing bills. As you can imagine, this is not a vote Congress likes to make.

Currently, the government says we'll hit our debt ceiling on August 2. If Congress does not act by then to raise it, some of the country's bills may go unpaid, according to The New York Times.

If the government doesn't pay its bills on time, this would be considered a "default." And, just like humans, if the government stiffs its creditors, it will face consequences. Those consequences could include a reduction in the country's credit rating and chaos in the financial markets.

This year, the vote to raise the debt ceiling became especially contentious partly because of the Tea Party's influence. Some Tea Party politicians and others are trying to rein in government spending and are using the debt ceiling issue as a way to make their stand, according to The New York Times.

As the debt ceiling drama plays out, there's only one way to ensure we don't have to worry about this issue again - start running budget surpluses and then return the excess tax money to the public!

No matter how the debt ceiling issue gets resolved, we'll continue to monitor the situation and take action that we deem appropriate for our clients.

As always, if you have any questions, please let us know. Thank you very much for your trust and confidence in us.

Best regards,

Sean M. Dowling, CFP, EA

President, The Dowling Group Wealth Management

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