What the ‘Debt Ceiling Increase’ debacle in the US has Taught us

The on-going ‘debt ceiling ‘ crisis in the US is a great example of why we need to have a budget and live within our means.  If the government of the United States of America-the most powerful government of the most powerful country on earth- can’t meet its financial obligations due to ever increasing spending, you bet that this could easily apply to us as individuals.

We have all been watching or following the ‘debt ceiling’ debate out of the US, with the congress’ arguing back and fourth as to whether they should raise the ceiling or not. As we speak, there is talk that an agreement has finally been reached, which we hope is true and will bring some relief to the markets.  For those wondering or confused by what this whole debt ceiling thing means, think of this as a decision of whether you should increase your credit card limit, to be able to cover more expenses.  While you may be able to increase your limit, at the end of the day, it is not your money and you have to pay it back.  This is a micro-version of what is happening in the US.  The bills are due and there is no money to pay for it anymore, so they are forced to raise their limit on how much they can borrow (or print) to pay their obligations.

What lessons did we learn from all of this?

But let us talk about the real issue here. What has this discussion of debt ceiling talk taught us? Probably a lot of things about the state and shape of the US economy, but most importantly about the basics of budgeting and finance.  Let us go through some of them.

Lesson 1:  Live within your means!
No matter who you are, what you have-even if you have the luxury of  printing your own money at will-if you don’t live within your means, sooner or later, your debt will catch up to you. If these basic lessons of budgeting apply to an entity as great and as rich as the US government, you know they will easily apply to us as individuals and families. And we sure don’t have the ability to print our own money as the US government does, so it should be even tougher.

The US has been accumulating debt by widening the gab between how much it earns and how much it spends, for over a decade now.  Sure, they may have increased the limit again now, but it remains to be seen whether congress will address the real issue here: to cut spending.  The republicans were delaying passage of the bill until they got guarantees of massive cuts totalling trillions in the next 10 years.  I believe that is the right way to go about it.  Although it still doesn’t make sense to me and many others how you can cut spending while still increasing the debt ceiling cap. It is one of those ‘one-step-forward-two-backward’ type of thing. Not to mention, the new agreement that has been reached doesn’t contain any ‘tax increases’ or at least that is what we have been told by congress.

Lesson 2: Make the Hard Financial Decisons Now!
Another valuable lesson to take from this is that you can’t keep putting off taking important and hard decisions and letting later generations deal with them. Had the US started tackling this issue over a decade ago, things would be a little less chaotic and more under control by now.  Let us not shift all the responsibility to our children and grandchildren. Let us start taking responsibility now so that they can enjoy a better future themselves.

Lesson 3: Be Accountable and Take Responsibility
This US  fiasco showed the basic lack of any real accountability or government oversight over something as important as this. You would think that issues related to bankrupting a whole nation would be studied, debated and researched more carefully, but doesn’t seem to be the case.  If a private sector employee was to cause so much losses for his company, he would be fired in an instance. With governments, this may not necessarily be the case and accountability is not easy to be assigned. For one thing, accumulating debt takes years and sometimes even decades, by which time politicians have changed and new faces have taken over.  Governments need to debate, question and scrutinize big projects (pensions, medicare, social security, wars etc.)  that cost so much money and all those involved with them (politicians, consultants, corporations, contractors etc.) Just because it is the government doesn’t mean you can rob them or charge them an infinite amount of money.

Lesson 4: We need better Leaders and Thinkers for the future
And last, and this all goes back to the basics again: governments, in cooperation with various business and academic institutions, need to do a better job of producing and graduating people that are highly qualified for the job, that think for the long term and are not just interested in getting re-elected. This is an area of vast importance and can’t be ignored, otherwise we will be back to this trap once again soon. If you read the terms of the new deal reached between the democrats and republicans, one of the conditions that the democrats have demanded is for the debt ceiling issue to be dealt with now and not have to face it till at least 2013 or after. To me, this  sounds more like a clause to save Obama’s political future and help him get re-elected in 2012 than a real and sincere conern about the American people.  In 2001, following the Enron and various other scandals, there was a lot of discussion about the importance of ethics in business and politics. Ten years later, I wonder if we have gotten even worse?

While we don’t know what would have been the real consequences of the US defaulting on its debt, we do know it would have been real bad, both for the US and the global economy. At a time when we are trying our best to come out of a recession, this (debt default)  is the last thing you want.  According to how some described what the consequenes would have been, this could have been an ‘Economigeddon.’ We are just glad an agreement has been reached at the least, but the real work hasn’t started.

So kids, adults or anyone else reading this, let us take a very important lesson from all of this: if, even the government of the United States is not immune to this, who are you to think you are invincible? get your finances and debt in order so you don’t have to face a chaotic and uncertain future.

Start now by creating your first budget, paying off your credit card and other debt and get used to living within your means.