To raise or not to raise, that is the question?

By Dean Kalahar

Should the U.S. debt ceiling be raised? We are being told by the experts in Washington that we have to raise the debt ceiling or disaster will occur to the economy. Is this true? The answer can be found in a simple economic comparison.

Consider a family that has a credit card and must budget their revenue and expenses.

Every month they pay off some of the principle and interest on their credit card, but keep using the card and thus add up higher and higher debt balances. They are not living within a balanced budget so they are running both a monthly budget deficit and increasing the overall family debt.

Over time, because of a slowing in family revenue and/or an increase in family expenditures, the ability to pay toward the principle credit card balance as well as the interest is becoming more difficult. More of the budget each month goes in paying off just the credit card interest.

As the overall debt builds and it becomes too difficult to pay anything towards the principle, they begin paying only the monthly interest payment on the card and keep racking up additional charges.

No one seems to mind this arrangement as the credit card company is making its profits through interest and the family seems to be able to make ends meet without having to make any tough choices. Everyone is happy for now.

Over time the monthly interest charges alone become very large and become a burden on the family budget because they are cutting into much of the other necessities the mother and father are supposed to provide, or have “given” as extras, to the children.

This is causing pain and personal hardship. In fact the elders are getting an earful of unhappiness from the young folk in the family.

To make matters worse, they have reached their credit limit on the card with the bank.

They are faced with a choice.

Ask for more credit to be given by upping the credit card limit, or figure out how to pay off their credit card debt while at the same time providing for the families needs.

Some would argue that if they don’t ask for a raise in their credit limit the family faces psychological embarrassment because the bank might “see them” as an increasing risky client to loan money to and lower their credit rating. The family might have to also shoulder the psychological burden of having less than “the full faith” of the bank. Even the neighbors might notice that the family doesn’t seem to be as “powerful” as before.

Others argue that the family might have their interest rate go up on current balances that are not paid, thus creating additional hardships and strains on the budget.

Some would simply say the family has to get the bank to raise the limit because there is no other way in which to keep the family “running” as usual. After all, some members of the family might get upset with a change in their lifestyle.

If the family does ask the credit card company to raise their credit limit and increase the amount of debt they will have an increase in the monthly minimum interest payment on the card.

In the short run, this will buy the family some time and allow them to behave “as normal” looking as if the family’s financial house is in order.

Of course, in the long term the family will have borrowed so much that they will not even be able to afford paying even the minimum monthly interest payment as well as the other necessities the family needs to provide. When that happens, and the family misses enough interest payments, the bank will either no longer extend them additional credit, or offer credit at a higher interest rate.

The higher rate will be due to the family’s greater credit risk, but credit will be offered to hopefully keep the family from going bankrupt and totally stop paying off their loans which would be bad for the credit card lender as well as those who invested in the lender.

In other words, the so called “experts” say: increase the family debt in order to pay the family debt so the family does not go bankrupt and stop paying its debts. Basic math tells us that this is an unsustainable equation.

In the worst case scenario, the family would default on the loan and declare bankruptcy. This will lead to pain and suffering of current as well as future generations of the family.

Additionally, this would leave the bank holding an IOU from the family that was itself worthless, and if enough defaults occurred within a bank, the bank itself could go bankrupt.

As the banking system is intertwined, the collapse of the entire system could be a possibility.

Raising the debt limit is like giving a crack addict just a little more “rock” while telling him to quit. The longer you wait to allow them to reach bottom, the bigger the problem and the more severe the danger.

What if the family does not ask for more credit and decides to not ask for a rise in their credit limit?

They would have to stop spending more than they earned and thus end the borrowing of money on credit.

The family would have to “make due” with less and show fiscal responsibility and restraint to create a budget that took care of the most pressing family needs while paying off the credit card debt in good faith.

The family could accomplish this by acting economically. They would cut back on spending in areas, increase revenue coming into the home in by working longer, harder and more efficiently. In addition, the family could be freed of outside burdens that impinge on working.

In short, the family could tighten their belts and pay the monthly interest and as much of the principle balance until the card was paid off while meeting their other obligations to the best of their ability by prioritizing spending.

This would cause upset and unrest among family members in the short run, but the long term health of the family would be secured

In taking this approach, the family would be seen as trustworthy, creditworthy, efficient and self sufficient. Their credit rating would be AAA and they would become a role model for other families to emulate. Faith in the family’s fiscal house would be unquestioned and if the family ever did need a loan in an emergency, they would have no trouble securing a loan as others would have “full faith” that the credit extended was backed by a history of creditworthiness and principled behavior.

Should we raise the debt ceiling? It is an easy decision.

The government believes it make sense to pay off old debt by securing more new debt, while at the same time spend more than you have and acquire even more new debt. Why? Because the benefits of spending today are immediate, while the costs are not paid until long after the politicians are out of office and have left behind a bill to be paid by the next generation of yet to be named Americans. It’s the perfect political scam, and it will bankrupt the nation. It’s only a matter of time, unless all Americans take a stand and say “no more.” Raising the debt ceiling will actually create the problems the “experts” are telling you we will avoid if we raise the ceiling.

Remember: If you are not going to borrow above your credit limit, there is no need to ask for the credit limit to be raised. And if you don’t ask for it to be raised it does not have to mean anything negative, in fact, it may signal nothing but positive responsible economic behaviors.