Decoding the US debt ceiling: The history, crisis, and potential fallout
Due to the complexity of financing during World War I, a general borrowing limit was established, known as the debt ceiling. Dive deep into its significance.
As the US debt ceiling crisis looms, President Joe Biden and House Speaker Kevin McCarthy are preparing for a vital meeting on Monday at 5:30pm. The current debt limit, breached in January, stands at around $31.4 trillion. The Treasury Department has been using "extraordinary measures" to maintain cash flow, but without agreement in Congress to raise the limit, Treasury Secretary Janet Yellen warns that the US may not meet its financial obligations by 1 June. (ALSO READ: Call with house speaker McCarthy 'went well', says President Joe Biden)
Understanding the Debt Ceiling
The debt ceiling is a cap that the US Congress places on the amount of money that the federal government is allowed to borrow. This limit was first introduced during World War I and has been raised or suspended multiple times since then.
A Brief History
In the past, the US Congress had to give its approval for every borrowing decision. However, due to the complexity of financing during World War I, a general borrowing limit was established, known as the debt ceiling. Similar crises to the one we're facing now occurred in 2011 and 2013, leading to a downgrade of the US credit rating and causing significant instability in the stock markets.
The Present Crisis: What's Happening?
Currently, the United States is precariously close to hitting its debt ceiling, set at $31.4 trillion. House Republicans are demanding spending cuts before raising the debt ceiling, while Democrats insist that Congress must repay America's debt holders without causing an economically disastrous default. The situation has been compounded by the fact that no party holds a full control of Congress, a scenario that makes the current debt ceiling showdown especially unpredictable.
McCarthy's Republicans control the House 222-213, while Biden's Democrats hold the Senate 51-49, making it difficult to reach a deal.
President Joe Biden and House Speaker Kevin McCarthy have been engaging in discussions to resolve the crisis. The pair had a positive phone call on Sunday, and both parties described their exchange as "productive".
The Republicans have proposed reducing spending, including a notable increase in defence spending, while the Democrats insist that any spending cuts should not exclude defence, which accounts for about half of all federal discretionary spending. The Republicans have also suggested a multi-year spending limit.
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The Future: What's Next?
With the June 1 deadline fast approaching, there are only a few days left to strike a deal. If a consensus is not reached, the US could default on its debt, which could have serious repercussions for the global economy.
Investors are bracing themselves for more market volatility as the negotiations continue. On Friday, the US was forced to pay record-high interest rates on a debt offer, showing the heightened risk perceived by investors.
Meanwhile, President Biden has said that he is open to cutting spending but disagrees with the Republicans' current demands. He is opposed to preserving tax breaks for the wealthy and certain industries while reducing funding for healthcare and education.
The US debt ceiling crisis is a complex issue with far-reaching implications. As President Biden and House Speaker McCarthy continue their negotiations, the world watches anxiously, hoping for a resolution that will prevent economic chaos
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