Be Inspired! / Living

Consumer Debt and the National Debt Limit Ceiling Crisis

Visa Credit Card

Image by Images_of_Money via Flickr

It’s Saturday, July 23, 2011 as I write this, there’s coffee to the right of me, and some dire news on the TV in front of me. Maybe you’ve heard: unless we raise the debt limit ceiling, we run the risk of default on our nation’s loans and, yes, possibly hurl ourselves off of a financial cliff.  If our national debt is a big-time version of a consumer’s personal debt, that makes this a pretty good time to tackle a particular badge task.

BADGE WORK UPDATE: MONEY SENSE

A task for this badge helps scouts understand how using credit cards to pay for goods and services isn’t free money, and it teaches how different interest rates make a real impact on your wallet. Scouts are asked to calculate what it means to pay for a $250 bike purchased on credit  with different interest rates: 9%, 12%, 18%.

I’m happy to do that, but I wanted to use this as an opportunity to educate myself more about our current debt crisis, and then see if I couldn’t articulate clearly here.

Now, the badge task in question doesn’t specify how long the scout will make payments on that bike. If she pays it off in one billing cycle, there’s no interest at all, and she may even rack up a few frequent flyer miles on their card. 😉 But let’s say she’s going to pay it off over the course of a year:

That may not seem like a lot of extra money to adults, but the extra money paid on that 18% is a lot cookies for most of the kids I know.

A good thing about this task is that it’s a reminder that interest rates aren’t set in stone — they’re determined, in fact, by the lender. These days, 9% is darned good interest rate on most credits cards, and you can only get it if you’ve got a great credit, or FICO, score as determined by Equifax, TransUnion, and Experian.  A great FICO score is determined by several factors, not the least of which is that you always pay your bills on time. Miss a payment, and credit card company will raise your rates, report the infraction to credit agencies, and lower your perceived credit worthiness.

And that’s pretty much what’s about to happen on a national scale–we’re about to miss a big payment.

House Republicans have linked their willingness to raise this ceiling to cuts in future spending. This  has never happened before. In fact, historically, Republicans have had no problem increasing deficits or the debt ceiling, in spite of their reputation as the fiscally frugal party. Think I’m wrong? Just remember what Vice President Dick Cheney said on the subject on November 15, 2002: “Reagan proved deficits don’t matter.”

Wha?

Now, both parties in Congress have always passed ceiling increases without much broo-ha-ha. Why? Because (and I’m not sure most Americans understand this), the debt ceiling represents money that Congress allocated in the budget and we have already spent. Raising the debt ceiling reflects what they’ve already agreed to. It’s like buying the bike and then deciding you’re just not gonna make the payments on it.

Our national debt means others out there in the world (from countries like China to individuals) have bet that the U.S. is a good credit risk (we pay our bills), and they have loaned us money at a pretty good interest rate (3% is the number I keep hearing). The U.S. has enjoyed a very AAA high credit rating from Moody’s, and that’s about the equivalent of a personal FICO score of 800-850. But because it costs a lot of money to run a country, and because we’ve been fighting two wars for a decade, we’ve created a helluvallotta debt:

So what happens if we don’t make a deal to raise the debt ceiling? Listen to any news channel and you’ll hear a lot of variations on that theme. We can’t be sure, entirely, because we’ve never done this before. But most smarties seem to agree that our credit status will be downgraded by Moody’s and the interest rates on our debt will go up, up up. Think about the bike example above, but substitute that $250 with a few trillion dollars.

This matters a lot. If our creditors raise the rate on national debt, it becomes longer and harder to pay it off. It costs more to borrow money. It looks a lot like what happens to families who fall behind, only now it’s going to impact a few hundred million people. How the hell would we get out of raising taxes then? And what about the impact on world markets? Greece, Ireland, Portugal and Spain have been dealing with unsustainable amounts of debt at high interest rates, threatening to bring down the euro and world markets. Days ago, the IMF and European union finally found a way to step in, restructure Greece’s debt, agree to share the loss and pain, and lower the country’s interest rates.

So how much national debt is too much?

Well, the debt that economists are referencing is compared to total Gross Domestic Product (GPD). If we were thinking of a household, the equation would look for the percentage of total debt against annual income (which also impacts a FICO score, btw). So if a household makes $100,ooo annually but has a $150,000 mortgage, a $25,0oo car loan, and $25,000 in credit card debt, there’s a debt-to-income ratio of 200%. Seems like a lot, but it’s more the norm than the exception for a whole lot of Americans.

When it comes to countries, however, it appears there is a magic number of allowable debt-to-GDP, past which debt starts to be unsustainable. That magic number? Ninety percent of GDP. Yes, “acceptable” debt limits exist when a country’s total debt is 90% or less of its GDP. A week ago, Greece’s debt was at 150%. And we’re currently hovering around 100% — so we have indeed veered off course.

Americans who are following this limit issue are starting to panic, and not without reason. If no deal can be made, look for a lot of people to move what’s left of their retirement accounts out of the market, if only temporarily, out of fear that the market will drop precipitously if we default on loans and/or if Moody’s downgrades our AAA rating. No one can blame ’em — it’s silly season in D.C., if you ask me.

And though no one IS asking me, I’ll just go on the record as saying that I believe that:

  • Our home is lucky to see steady income.
  • It’s good to pay cash and we rarely use credit anymore for a lot of the reasons mentioned here (though it’s great to rack up flyer miles on business trips).
  • It’s an honor to pay taxes to live in a great country, and I am not overtaxed, but I’d hate to have taxes raised as an indirect of higher national debt rates brought on by this stupidity.
  • The wealthiest among us should share a higher burden in taxes than they currently do, and the Bush tax cuts should be repealed to generate critical revenue.
  • We *do* need to revisit how Social Security and Medicare are structured.
  • I think the Bush administration put our wars on a credit card, and a big part of our debt problem is that they were *not* transparently included in the Federal budget for years.
  • We need to get out of those wars and cut the Defense budget. A lot.
  • The President needs to continue to demand shared sacrifice.
  • The Tea Party can’t see the forest for the trees. Their representatives in Congress have manufactured a crisis that didn’t need to exist. They’re nuts, and they should quit holding the nation’s future hostage.

Again, I’m writing this on Saturday morning, July 23rd. Right now, House and Senate leaders are sitting at a table with the President. Maybe by the time this posts on Monday, July 25th, a deal will have been struck. Fingers crossed this will be old news in 48 hours. That’d be great.

And if you’d like a little more background on the national debt and debt limit ceiling, I’d like to recommend this article from the Washington Post, or a trip to NPR’s Planet Money.

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One thought on “Consumer Debt and the National Debt Limit Ceiling Crisis

  1. Jean for president. After all, you’re a girl scout. That should play well to the Tea Party right before you earn your shooting badge.

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