Dr. Tony Vercillo

Link: http://www.fullerton.edu

Several of my students have been asking what this whole thing is in regards to raising the debt ceiling. Well, let me explain it.

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Every country has what’s called a Gross Domestic Product, or a GDP. The GDP of a particular country deals with the country’s spending power and net worth. For example, everything you own that has a quantifiable value is part of your net worth and spending power. If all you own is a car that has a value of $10,000, then you are worth $10,000 because you can sell the car and have that money to spend.

So now, what is a debt ceiling? Well, a debt ceiling is the worth of your debt. If you have loans (cars, student, etc…) and credit cards, that amount that you owe is your debt. Now say, for example, you get a certain amount that you are allowed to spend on your credit card and with your student loans, but you don’t. Well, the total amount that those are worth is your debt ceiling. And if you’ve max them out, then you’ve hit your debt ceiling.

As of the end of 2010, the GDP of the United States was listed $14.66 trillion. That means, if the United States sold off everything it owns, the country would have $14.66 trillion to spend. You should also know that the United States’ GDP makes up almost 24% of the world’s economy. That’s a lot.

So what does this all mean for the country? Well, for the first time in history, the debt ceiling and the GDP are about the same amount. This means that the debt to GDP ratio is zero. As in broke. Flat broke. This will cause the credit rating and the value of the dollar to drop.

For the first time in history, the European Union has a higher credit rating then the United States. The EU, though, is having financial difficulties that the United States is used to experiencing. For example, Greece and Spain are in serious financial trouble. Since both countries are part of the EU – which has its own currency, the Euro – its credit rating and currency value are being affected by issues that entire countries are having, similar to how our country is affected by issues with our states.

What all this is saying is that the two biggest super powers in the world are in financial crisis. Changes need to be made to get the world out of the mess that it’s in. A country is like a non-profit. It’s not out to make substantial amounts of money, but it is a business. It needs to make money to be able to spend money. That makes commerce the backbone of any country. So, what do you think? Any suggestions to help fix the problems of the world? Sound off in the comments below!