S&P Downgrades U.S. Debt... Will Repo Men Come for Air Force One? - Page 2 of 2

As recently as 2004, there was a similar problem that didn’t generate nearly as much fanfare as we are seeing today. In that year the debt ceiling was hit on October 14, and wasn’t lifted until November 16. Somehow the Treasury muddled through using some creative accounting methods that seemed, at least, not to exceed the limit until it was officially raised in what was presumably a burst of Thanksgiving good cheer. I, for one, do not believe that the debate this time around will result in utter financial chaos, and I do not believe that economists and investors believe it either. Instead, this debate along with S&P’s announcement and all of the inevitable hysteria that you will hear as we approach the inevitable ceiling smackdown is ultimately a cautionary tale, and it should be viewed as such.

The government’s bond ratings are very similar to your credit scores. If you borrow too much, it will show up on your credit report as a negative, your scores will decline commensurately, and you will face significant financial fallout. We all have a debt ceiling. Unlike the government’s, yours is not set by a simple statute with a precise number. Nonetheless, you know when you’ve climbed too far up the wall. You start making only minimum payments on your credit cards. You put off the decision to buy or lease that new car. You get calls from creditors because your payments get later and later.

Borrowing too much is a very slippery slope. In the case of the U.S. government, interest costs are approaching 10% of GDP; therefore, part of the need to lift the ceiling is caused by the egregious amounts necessary to service the existing debt. When you borrow too much, there is no solution but restraint and hard work. When an individual has reached his or her personal debt ceiling, the only option is to decrease spending and increase income. That could mean getting a second job as well as no more dinners out for a while. The government has to do the same thing. They’ve got to cut spending (which you’ve been hearing a lot about lately) and increase tax revenue (which hardly anyone, other than the President, really wants to talk about).

Frankly, all things being equal, it seems to me that the government is in a pretty enviable position. Our government will be 235 years old in July, about four days before the debt ceiling is hit. I’m confident that when push comes to shove our elected leaders will simply vote to increase the debt ceiling. I’m less confident they’ll come up with a sensible plan to pay down the debt that employs both sensible spending cuts and tax increases. But I’m holding out hope.

Unfortunately, real people aren’t afforded the same luxuries as the government. When we hit our debt ceiling, nasty people arrive at our house and start repossessing everything in sight. Somehow, I just don’t foresee anyone coming to repossess Air Force One.

Image by Noclip, via Wikimedia Commons