First, the basics.
The country is $14.3 trillion in debt and will begin defaulting on its financial obligations on Tuesday unless Congress votes to raise the country's debt limit. Writing for Slate, Annie Lowrey summarizes: "On (Tuesday) or soon after, Treasury will 'exhaust its borrowing authority.' That does not mean that we 'hit the debt ceiling.' We hit the ceiling back in May, and since then the country has not been able to issue new debt, only to roll over maturing bonds. 'Exhaust its borrowing authority' means that Treasury will no longer be able to fudge the country's finances enough to keep all payments going out on time."
Pres. Barack Obama is asking Congress to raise the debt ceiling by $2.5 trillion.
The major point of debate isn't whether to raise the debt ceiling, but how much future federal spending to cut in conjunction with raising the debt limit.
How did we get here?
The New York Times offers a series of highly informative graphic illustrations here, here and here. The Times also has a rigorous Q&A about the ongoing crisis that traces the debt limit back to its origins.
"Congress can pass a budget that requires borrowing, and then argue later about whether to approve that borrowing. … The system goes back to World War I, when Congress first put a limit on federal debt. … Over the years the limit has been raised repeatedly, to $14.3 trillion today from roughly $43 billion in 1940."
So what happens now?
Any legislation to raise the debt ceiling must pass through both the Senate and House, and be signed by Obama.
Senate Majority Leader Harry Reid, D-Nev., advocates at least a makeshift solution that will prevent the country from going into default.
House Speaker John Boehner, R-Ohio, is pushing for a package of spending cuts over the next 10 years that will exceed the amount of any increase to the debt ceiling.
Tea partiers like Sen. Mike Lee, R-Utah, are insisting that they won't vote to raise the debt limit unless Congress first passes a Constitutional balanced budget amendment.
What does this crisis mean for the nation's future?
The stock market fell sharply again Friday, and a further dip in the stock market would likely occur if a government default occurs — potentially wreaking havoc on your 401k retirement accounts. But Fidelity Investments, quoted in a U.S. News and World Report article, is strongly advising investors to hold tight and ride out market fluctuations.
"Now, more than ever, investors must not let the uncertainty of short term events cause them to make rash portfolio decisions," says Fidelity's Joanna Bewick. "Trying to time market gyrations is difficult and often costly. History has shown that near-term market declines, although unnerving at the time, are often followed by rebounds. In many cases, investors are better served by remaining fully invested over a market cycle, enduring near-term volatility but not missing out on the subsequent recovery."
Even if the debt ceiling is raised in time, the U.S. could still lose its AAA credit rating. The Christian Science Monitor explains which two main issues rating firms like Moody's and Standard & Poor's will be monitoring.
"First, in the short term, will Congress allow more borrowing by lifting a self-imposed debt ceiling? … Second, is the U.S. taking steps to correct long-term imbalances in the federal budget? … The first is obviously the most urgent of the issues, but the credit scorekeepers want to see progress on both fronts."
The Monitor also lists "five ways U.S. default would hit your pocketbook": a devalued dollar, higher interest rates, bigger recession threat, higher taxes coupled with bigger spending cuts, and the nation losing its preeminent global status.
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