U.S. DEBT DEAL: What You Should Know

If you’ve been paying attention to the news lately, there’s no way you can miss the drama unfolding in Washington over America’s spiraling debt crisis. But you may be asking yourself, what exactly is the debt ceiling and why the big fuss? What’s in the debt deal? Here are some key facts that you should know.

The debt ceiling is the limit on how much money the U.S. Treasury can borrow. Think of it in terms of a credit card limit which has been maxed out. Currently, the debt ceiling is set at $14.3 trillion and the U.S. Treasury owes around $14.293 trillion. This money includes both public debt; money that is owed to investors, foreign governments, pension funds, etc and intragovernmental holdings; Medicare, Social Security, etc.

Just like us, the U.S. government has a “credit score.” The highest credit score is AAA, which is what they currently hold. But even with the new debt deal, the U.S. government is still at risk of a credit downgrade. If that happens, it would increase the cost of borrowing both for the U.S. government and Americans.

On a daily basis, the American government spends more than it collects in revenues. For every dollar spent, the U.S. borrows 43 cents. In order to avoid defaulting on their loans, President Obama proposed a plan to cut the fiscal deficit by $4 trillion over 10 years and increase taxes for those earning incomes over $250,000. That deal would have translated into $2 trillion in budget cuts, a $1 trillion reduction in outstanding interest payments on loans, and another $1 trillion in tax reform.

In a bitter last-minute deal, marking the end of the nastiest partisan debate Congress has seen to date, the Senate finally approved a new debt limit legislation, 74-26 – after it passed the House, 269-161, with the support of 174 Republicans and 95 Democrats. Leading many to dub this a “Tea Party victory.”

All federal legislation must first gain approval from the House and then be passed by the Senate, before the President can sign it into law.

While the 2011 Budget Control Act fell well short of the President’s expectations, America managed to avoid its first-ever default. Following the vote, a deeply frustrated Obama said, “This deal is a victory for politicians but a defeat for families.”

– It allows for the debt ceiling to increase by at least $2.1 trillion, enough to keep the country borrowing money to pay its bills until 2013.

– It includes spending cuts of about $2.4 trillion to offset the debt ceiling increase.

– It will immediately cut spending by $917 billion over the next ten years, $350 billion of which will come from the first defense cut since the 1990s. The Defense Budget now accounts for more than half of all discretionary spending.

– It creates a 12-member bipartisan committee to find another $1.5 trillion in budget savings by November 23. Congress would have an up or down vote on their recommendations by December 23 and no amendments would be allowed.

– If the new “Super Committee” fails to identify at least $1.2 trillion in a deficit reduction,  or if Congress rejects its findings, nearly an additional $500 billion would automatically be cut from both defense and domestic programs. However, it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military pension plans. This provision is in place to eliminate the usual political bickering and force a bipartisan agreement.

Despite the fact that the actual programs to be slashed have yet to be named, the uncertainty and speculation surrounding the debt deal continues to hamper the growth of an already struggling economy. Many fear that America will fall into a double-dip recession if the focus isn’t shifted back to stimulating the economy and fostering job creation.

The U.S. unemployment rate remains above 9%, consumer spending is down, investor confidence continues to decline, and their GDP is at its lowest in six decades.

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