Does that ceiling come with a fan?

If you have listened to the news in the last month, you have probably had flashbacks to the story of Chicken Little. The stories about the debt ceiling sound a lot like "The sky is falling! The sky is falling!" Unfortunately, this problem can't be blamed on an acorn (or a tile from the bottom of an alien space ship).

If Congress takes no action, in six short weeks, the United States Government will no longer be able to pay its bills. Whether we reach this debt ceiling, and how we address it could have an enormous impact on both the national and global economy. Why isn't it easy to fix? To explain, picture a single household trying to manage their budget. (Yes, it is an over-simplification, and it misses some key points, but as they say, "it is close enough for government work.")

Imagine you are a household that is making less today because of the recession. Expenses have continued to rise, and are now more than your income. For the few years, you have made up the difference with a home equity loan, and several credit cards. You have even borrowed against your 401K and other savings. It hasn't been easy, or fun, but you are surviving.

Unfortunately, you have run out of options. Your home is underwater, and you cannot borrow any more against it. On May 15th, you reached the limit on your last credit card. All your cards are now at the max. Since then, you have been using the last of the money in your checking account. You have done the math, and you are okay for a few more weeks, but by the first of August, you won't be able to cover everything. You still have your job, but the paychecks are going to be $120 less than the bills. You could just not pay some of the bills, but that would mean bankruptcy, which could hurt your financial situation for years to come.

What do you do now?

You could try to increase your income -- it should be easy to find a higher paying job, tomorrow, in this economy. Of course, you could also fill out one of the 37 credit card offers you got in the mail this week -- increasing your credit limit would help you be able to pay the bills for now. Or, you could (*gasp*) cut your expenses -- but are you really ready to go without mobile internet, McDonald's, or Starbucks? What to do... what to do...

This is the situation facing our government. On May 15th, the US government reached its credit limit. We cannot borrow any more. On August 2nd, we will no longer be able to make all the required payments. The government will still be collecting taxes, but the taxes will be $120 Billion less per month than the expenses. (Those expenses include everything from interest on debt and social security to paying congress and funding the military.) If the government decides to not pay some bills (to default), the effects could be long reaching and detrimental to our future economy.

Congress faces the same options as our hypothetical family:

1. They could "get a better job," by raising taxes. However, that probably won't happen over night (how fast can you get a better job?). And there are certainly risks with trying to increase revenue.
2. They could raise the debt ceiling (imagine Boehner and Pelosi doing the "raise the roof"). Increasing the limit and taking out more debt is the quickest solution. (Can you say addiction? Just a little more debt...)
3. Or they could cut the expenses. (Stop laughing!)

The answer for the country has to be the same as for our individual family. Yes, we can look for better paying job, but we can't rely on that. And yes, we will probably need a little more debt to make it through the short term (preferable from our family instead of the loan shark "Dewey, Cheatum, and Howe"). But the fact of the matter is we have to cut our costs... now. We need to call up the credit counselor; put together a reasonable budget; and live within our means. It isn't fun to live on noodles and not go out, but it is worth it to keep our home.
The US government has to face reality. We cannot default on our payments. We have seen what has happened in Iceland and Greece -- it is not anything we want for the United States. We will have to raise our debt ceiling; there is no other solution that can be in place by August 2nd. However, to raise the limit without putting in place large, specific, binding spending cuts is irresponsible. It won't be easy, and someone is sure to be upset by where the ax falls. But, we have to live within our means.
Let's just hope our Congress can figure that out, before the sky really does start falling.