As if the fiscal cliff wasn't enough Washington drama for one year, the dysfunction of our nation's capital is once again on display for the world to see as lawmakers wrangle over the debt ceiling. But there are some key differences between these two dramas.
Looking Back at the Fiscal Cliff Debate
The fiscal cliff debate "only" affected the vast majority of the 315 million Americans. The debt ceiling debate could impact the nation's credit rating, and that, in turn, could have implications for the nation's economy.
Let's take a look back at the fiscal cliff. According to a recent study, as fiscal cliff debates heated up, consumer confidence fell sharply. November and December weren't banner months for consumer spending - or the stock market, for that matter. Consumers held on to their money, helplessly waiting for the resolution of the fiscal cliff debate.
Looking Ahead to the Debt Ceiling Dispute
Although Americans won't be as glued to their TVs and laptops waiting for a resolution to the debt ceiling debate, the study showed that when Washington fights, Americans don't spend, and that's not good for an economy that consumers still fear.
21% of Americans still list the economy as the country's biggest issue, according to a recent Gallup poll. The same poll revealed that 18% of Americans believe that politicians and government are the real problem. Which one of those statistics is more alarming? You decide.
What does the country think of the debt ceiling? In an AP-GfK poll, 53% said they believe that if the debt limit isn't extended, the country will face a large-scale economic crisis. They might be right. Economists warn that if Congress doesn't authorize the paying of bills for goods and services we've already purchased, the United States' credit rating may drop, causing interest rates to rise, which will in turn increase our borrowing costs.
Possible Debt Ceiling Solutions
In the event that the parties cannot come to an agreement, a few other options have been thrown around.
One is invoking the 14th Amendment. Written during the Civil War era in part to guarantee compensation for soldiers and their loved ones, the president could use the amendment to sidestep Congress and raise the debt limit himself. President Obama said, however, that he wouldn't consider invoking it.
Silly and embarrassing fix No.2 could be the issuance of IOUs. Think back to your days as a youngster when you told your parents that if they would buy you the newest video game, you would pay them back. This option isn't much different. In this case, if the government owed you money, they would issue you an IOU that would later be paid with interest.
If you needed the money earlier, you could take the IOU to a bank, pawn shop or a rich uncle who could purchase it from you, probably at a discount. Such IOUs would effectively be bonds to pay for bonds.
We've saved the most outlandish solution for last: the $1 trillion coin. Money may not grow on trees, but if you are the federal government, you could order it minted in the form of a platinum coin. There are laws against printing money at will and there are laws against minting gold and silver coins, but platinum? That's OK.
All the government has to do is mint a coin, stamp a value of $1 trillion on it, rinse and repeat, and as if by magic, we will have enough money to cover our debts without raising the debt ceiling. Why not mint enough of these coins to pay off our entire debt? Now that would just be ridiculous!
The Bottom Line
The debt ceiling is nothing to laugh about, but for Americans who live in the real world, there are at least two truths that will never change: If we purchase something, we have to pay the bill, and we aren't allowed to assign an arbitrary value to something, call it money and pay our bills with it.
The political drama is beginning to heat up. We've seen this drama before. Raise your hand if you believe another temporary measure is in store.
More From Investopedia
- Politics & Government