Want to know more about the current American debt crisis? Read the previous posts in this series. Part 1 describes the basics of our national debt, and part 2 explains the present crisis.

What if the government debt reaches its debt limit, and politicians don’t pass a raise of that limit?

There is one guarantee here. If the debt limit is reached, the Treasury will not lawfully be able to issue any more debt. According to one CNN article, this will leave the country with $118 billion per month in unfunded spending. Without the ability to borrow more funds, this amount must either be cut from the federal budget, or “created” through the printing of currency. Eeek.

What are some possible scenarios?

We don’t have to worry about other countries demanding payment. What we do need to worry about is getting to a point where we can’t find investors willing to purchase our debt. If that happens, we’ll either need to drastically cut  national expenditures, or create more income to meet the debt needs of our country. Income can be increased by either (a) taxation (b) printing more currency.

Scenario A:

The debt limit is raised, and eventually a budget is passed that quickly draws down the deficit (and eventually the overall debt). Within 10 years we are back to pre-1980 debt levels.

Scenario B:

The debt limit is raised, and a budget is passed that slowly draws down the deficit. The debt limit remains high for decades, and the economy contracts as politicians continue to cycle through spending and cutting sprees. Taxes increase. Americans learn to drive used cars and cook with beans as lifestyles begin to realign with income.

Scenario C:

The debt limit is raised, and a budget is passed that focuses on spending the economy back into health. Government gets bigger, taxes get bigger, citizens get smaller. The debt to GDP ratio increases, but US debt is still funded as more favorable than alternatives. This scenario would eventually roll into either option B or D.

Scenario D:

The debt limit is raised, and then raised again, as politicians cannot agree on a budget. US long term security yields increase slowly, and then rapidly as investors become wary of the country’s ability to service its debt. Left with a huge deficit, the government prints its “necessary” debt (by some fancy pants monetizing), while telling themselves that it’s a one-time, temporary measure. The value of the dollar drops and high inflation, then hyper inflation (generally defined as inflation percentages increasing daily rather than monthly) ensues.

Scenario E:

The debt limit is not raised. A future budget is not agreed upon. Rather than drastically cutting spending to meet the steadfast debt ceiling, the government begins to monetize the debt. High inflation ensues.

Which scenario is most likely? I believe a combination of scenarios B & C are most likely, due to the current political climate. In essence, the government is most likely to “kick the can down the road”.

Keep in mind when you’re hearing the current debt proposals, that our current budget deficit amounts to $1.267 trillion ANNUALLY. Even the most aggressive proposals only attempt to capture a small amount of that deficit, leaving the remainder to be dealt with at some point in the future.

So what can I do? 

Get out of debt. This is counter-intuitive to the possible inflation we might observe given scenarios D or E, but this is an important step toward changing the American mindset toward money, which has ultimately put us in this position.

Make friends and increase your community. If our country does fall on hard times (and indeed, it already has for many) who you know will make a difference both in shared knowledge and in positive attitude.

Hedge your investments. No, not in a “I’m a fund manager trying to predict the future kind of way” but more in a “I’m a mom with little kids and I’m not sure what’s going to happen, but God is good” kind of way. Invest physically and monetarily in God’s work here on earth, taking joy in God being glorified. Consider also investing in tangibles that would maintain their value even amongst high inflation.

Memorize scripture; it’s infinitely more valuable than beans, bullets, and band-aids. Did I just use that semi-colon right? I need to get these things figured out if I’m going to home school 🙂