What is it and how it can blow up the economy

  • Congress is fighting again to raise the debt ceiling. The fate of the economy is at stake.
  • The cap puts a cap on the amount the government can borrow, but it has become a political weapon.
  • Here’s what the debt ceiling is and why it’s so dangerous for the US economy.

Congress rushes to a deadline that could plunge the United States into a

recession
. If this sounds familiar to you, you already know a lot about the “debt ceiling”.

If not, you don’t know that every once in a while Congress has to ask permission to pay America’s bills, and about half of them usually don’t want it. It is the “ceiling” that must be raised.

Republicans led by Senate Minority Leader Mitch McConnell are pushing back Democratic attempts to enlist their help, paving the way for a perilous showdown that could end in default. In other words, each party waits for the other to blink first.

Experts say federal default could cause upheaval that spill over into the economy Under the form job losses, brutal cuts in Social Security payments and US troops missing scheduled paychecks.

Behind America’s Ever-Growing Debt

The federal government is counting on the debt. She regularly spends more than she raises taxes. To cover this cost, the Treasury Department borrows money by auctioning bonds. That is why the government’s debt exceeds $ 28 trillion.

The debt ceiling was introduced in 1917 to encourage the government to slow down its borrowing. Reaching the limit forces one of the two outcomes. Congress could raise the cap or suspend it temporarily and push the issue into the future. Or the government could default on its debt.

Over the past 50 years, the government has raised it 57 times. It’s not hard to see why. Failure to pay the public debt could drag the country into an economic recession. Spending on critical programs would be frozen. The strength of the dollar would likely collapse. And financial markets would slide into uncharted territory as investors brace for unprecedented economic catastrophe.

There is an even greater risk. The dollar is the world’s reserve currency, which means other governments depend on its value. A default on the US government debt would seriously undermine that confidence. The value of the dollar could drop as the global financial system values ​​a dollar that is unreliable – or seeks an alternative.

The United States has avoided this for as long as the debt ceiling exists, but as it has been rising steadily, it has served as a political weapon rather than a real threshold. Both Democrats and Republicans fought to raise the cap, and their latest row is no different.

The last battle on the loan

McConnell has repeatedly said Senate Republicans will not vote to lift the limit, adding Monday that “Democrats don’t need our help.” It is reminiscent of a 2011 showdown between House Republicans and the Obama administration that caused an uproar in financial markets and led to the country’s first credit rating downgrade.

Other Republican lawmakers have said raising the cap will open the door for Democrats to pass their $ 3.5 trillion spending plan.

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer said Republicans were more to blame for the debt problem. Raising the debt ceiling is also about managing the past spending that both sides have racked up under the Trump administration, they said.

Under President Donald Trump, GOP lawmakers sharply increased the deficit with their 2017 tax cuts and the first COVID-19 bailout of nearly $ 8 trillion. Lifting the limit, Democrats say, allows the government to pay the bills for these policies.

Pelosi and Schumer hope to pass a law that will fund the government until December, but maybe that’s a choice they shouldn’t have to make.

Eliminating the limit is the “obvious solution” to avoiding recurring debt fears, David Kelly, chief global strategist of JPMorgan Funds, said in a recent memo. There is no evidence that the cap slows the growth of public debt, the very task for which it was created in the first place. Instead of repeatedly voting for temporary fixes, Congress can remove the limit and focus more on building a sustainable budget, Kelly said.


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