Issue #114: Three experts told me to chill out about the debt ceiling

Hi y’all —

Ah, fall: pumpkin spice latte season! Gilmore Girls rewatch season! Leaf-peeping and apple-picking and dressing-like-Chessy-from-the-Lindsay-Lohan-remake-of-The-Parent-Trap season! 

Nothing could ruin my good mood... except for the impending sense of doom I’m feeling reading all these headlines about the national debt. I can’t make heads or tails of the politics, and as a result I’m finding it hard to tell whether I should be freaking out about my finances. The whole situation is totally harshing my crisp air mellow.

Deep breaths, Julia. You are a Scholar, and Jess Mariano believes in you! You can get to the bottom of this.

OK. What is going on with the national debt, and do I need to be worried?

The quick and dirty explanation is that the U.S. borrows a bunch of money all the time because it spends a bunch of money all the time. Most of the debt is “owned” by the public: foreign countries like China, the Federal Reserve, mutual funds and the like. To raise cash, the Treasury can issue bills, notes and bonds — but only to a certain amount. Created by Congress in 1917, this is called the debt ceiling.

Once we reach the debt ceiling, the Treasury has to stop taking on debt. To avoid this, the limit gets raised every so often. Seriously. It’s been adjusted more than 80 times.

Right now, the ceiling is $28.4 trillion. As I write this, the national debt is $28.43 million. It’s partially Donald Trump’s fault but also Barack Obama's, Joe Biden's and the pandemic’s fault.

“The national deficit and the national debt has gotten far worse in the past year and a half with COVID,” Derek Horstmeyer, a finance professor at George Mason University, tells me. “With interest rates near zero and a lot of people out of work, this has encouraged the federal government to borrow as much as they can.”

The U.S. hit the ceiling back in August, and the government is set to run out of money on Oct. 18. But while Democrats are generally on board with a bipartisan effort to raise the cap, Republicans aren’t. It’s basically a protest against Biden’s proposals.

“Democrats control the Senate, the House and the White House,” Sen. Mitch McConnell, R-Ky., tweeted recently. “If they want to ram through another reckless taxing and spending spree that hurts working families and helps China without any Republican input, they will need to raise the debt limit on their own.”

Horstmeyer said all of this matters because if the U.S. can’t pay its bills, it could trigger a default. A default “would produce widespread economic catastrophe,” as Treasury Secretary Janet Yellen wrote in the Wall Street Journal in September. The government could stop or delay Social Security checks, military paychecks and child tax credit payments, leaving “millions of Americans ... strapped for cash,” Yellen said. It could even lead to a recession.

The specifics are scant because the nation has never defaulted before. But it’s safe to say that the markets would see some short-term volatility, according to Terry Sawchuk, the founder of Sawchuk Wealth in Michigan.

The U.S. could start to seem riskier, which could translate into increased interest rates on things like mortgages and student loans. Betterment’s Mychal Campos said that could limit the funds young consumers have for investing in the longer term. And less money invested — or a delay in getting started investing — could equal “less of an opportunity for the power of compounding to work,” he adds. That general “tightening of purse strings” could hurt me in the future.

So, yeah, a default would be bad. However, Sawchuk said I shouldn’t panic.

“From my standpoint, I really don’t think there's any chance long-term that we won't get an extension,” he says. “We’ve been down this path numerous times, and every single time the debt ceiling gets extended.”

Indeed, Politico reported that the Biden administration is looking for ways around the Republican roadblock. (No, I’m not talking about a trillion-dollar coin.) Horstmeyer pointed out that the Federal Reserve is considering alternative ways to make payments, which would “be an unprecedented step but would mitigate the effect of a default.”

Lawmakers are also probably highly motivated by the fact that midterms are next year.

“It’s not something that the incumbents really want to have happen on their watch,” Sawchuk says.

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

If political drama runs out the clock on the national debt, it’s not going to be pretty — especially for Americans who rely on the government for money. But a default is unlikely.

If the headlines are still stressing me out, though, Campos recommends using this as a chance to review my budget and see if there are any places I can cut back. Maybe I’ll even be able to free up money to put toward my own debt obligations or investing opportunities.

VIA GIPHY

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RECEIPT OF THE WEEK

check out this wild celebrity purchase

VIA INSTAGRAM

Apple CEO Tim Cook was confirmed this week to be the 2019 buyer of a $10.1 million mansion in California. The house has five bedrooms, five bathrooms, a custom pool table, a swim-up bar, a gigantic fireplace, mountain views and an infinity pool. With those amenities, if I were Cook, I’d be pressing the... home... button all the time.

INTERNET GOLD

five things I'm loving online right now

1	Monkey on goat.
2	Liter bottles of wine are so in right now. And by “in,” I mean “going in my mouth.” Delish.
3	The Guardian’s Australian bird of the year contest is in its final days, so vote now or lose your chance forever. While you’re casting your ballot, make sure to read the short descriptions of each species, which includes gems describing one flyer as “the Big Foot of the bird world” and another as “gregarious, brash and not averse to a little mischief.” Same.
4	Common Venmo charges, decoded.
5	How does The Little Prince, a book published by a French author in 1943, have a better grasp on NFTs than I do? And why are its illustrations being tokenized? I guess it all comes back to the fact that “the most beautiful things in the world cannot be seen or touched — they are felt with the heart.”

401(K)9 CONTRIBUTION

send me cute pictures of your pets, please

VIA KELCEE GRIFFIS

This is Lexie. Lexie doesn’t mind the debt ceiling... she cares that she just got busted for eating a leaf.

See you next week.



P.S. Are you following the national debt drama? How much wine can you drink in one sitting? What’s your favorite fall activity? Send jack-o'-lantern ideas to julia.glum@money.com or @SuperJulia on Twitter.

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