The US Congress has put off a potentially deadly game of brinkmanship over raising the debt ceiling, which sets a limit on how much the government may borrow.
Treasury Secretary Janet Yellen had already informed Congress that the US will reach its debt ceiling by October 18th.
Republicans challenged Democrats to settle the disagreement on their own. Democrats slammed the action as rash. Fears of a national debt default arose as a result of the standoff.
However, with the deadline looming, Congress decided to extend the debt ceiling until early December, deferring the drama for a few weeks.
Although a default is still unlikely and has never happened in US history, it would have disastrous consequences for the US and the world economy if it did.
Debt limit impasses are nothing new in Washington politics, but with a sluggish economic recovery from the ongoing Covid-19 epidemic, financial markets were jittery.
Here’s all you need to know about the debt ceiling discussion.
Understanding The Debt Ceiling
Because the US government spends more than it earns in taxes, it must borrow to make up the difference.
Borrowing is done through the US Treasury, which issues bonds. US government bonds are regarded as one of the safest and most trustworthy investments in the world.
Congress set an aggregate restriction, or “ceiling,” on the amount of debt the government may acquire in 1939.
The debt limit has been raised over 100 times to allow the government to borrow additional money. It is frequently the topic of bipartisan action in Congress, and it is seldom the source of a political impasse.
However, as the country has become increasingly polarized, politicians have exploited the debt ceiling vote to exert pressure on other topics.
Republicans set up a blockade against President Barack Obama’s spending plans in a 2013 stalemate, the last time the US was in real risk of falling over the “debt cliff.”
But, if history is any indication, politicians usually back down at the last minute. This looks to be the case once more this month.
What Options Did The Government Have?
The US would have defaulted on its obligations, which now stand at approximately $28 trillion (£21 trillion), for the first time ever sometime in the second part of October.
Every single government program presently accessible would face delays or service modifications as a result of such an occurrence, which would also have an impact on federal financing for individual states.
According to a Goldman Sachs study, the US Treasury would have to stop more than 40% of anticipated payments and financial help to US families.
Last Monday, the Pentagon issued a statement expressing worry that military personnel may not be paid in whole or on schedule as well.
Default may also result in a rise in interest rates and the ruination of America’s creditworthiness, making the US more costly to live in and harming the economy. The stock market would likewise be thrown into disarray.
Secretary Yellen warned of a “historic financial disaster” that would leave the US “permanently weakened” if the debt ceiling was not increased in a Wall Street Journal opinion article last month.
Failure to raise – or temporarily suspend – the debt ceiling endangers the global economy, exacerbating the effects of the unfolding once-in-a-generation public health catastrophe.
Investors all across the world may be selling US assets and losing faith in the US dollar, which has served as the world’s reserve currency for decades.
Washington’s “counterproductive brinkmanship” over the debt ceiling has been condemned by the International Monetary Fund (IMF). It also proposed that the cap be replaced with a different funding mechanism.
How Will Both Parties Move Forward?
Mr McConnell presented a compromise last week that Democrats have finally accepted after two efforts to bring up the debt ceiling legislation through normal procedure in the Senate failed.
Republicans will join Democrats in raising the debt ceiling by a predetermined amount – $480 billion (£352 billion) – to guarantee payments are paid until December 3rd.
Some Republicans, including former President Donald Trump, have complained that the temporary measure amounted to “folding to the Democrats,” but it has already passed both chambers of Congress.
To avoid a default, Congress will have to vote again in December, according to the deal.
The temporary solution offers the two sides more time to work out their differences, which are still unresolved.
Mr. McConnell addressed a letter to President Biden shortly after the Senate passed the law, pledging not to “give such help again if your all-Democrat administration slips into another needless catastrophe.”
Separately, legislators kicked the can down the road last week when they enacted a short-term plan to keep the government financed through December, implying that there will be a fresh round of troubles with the holidays approaching.