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  • Writer's pictureEthan Erickson

Raising the Roof: A Debt Ceiling Mess



By: Ethan Erickson and Shane Masterson July 27, 2023

 

Last month, a critical standoff ensued between President Biden and Speaker of the House McCarthy over the issue of raising the debt ceiling. The debt ceiling dictates how much money the United States can borrow to run government programs. While some fiscal hawks believe that the deficit has gotten much too extreme and that spending should be severely cut back, their opponents argue that the borrowing goes to much-needed programs and is worth the further accumulation of debt.


In the past, debates over the debt ceiling have proved to be a recurring headache for the Federal Government. Congress has raised or extended the ceiling 78 different times since 1960, and with this recent crisis, legislators were called on once again to do just that.


Simply the perceived fear of a debt default, according to the White House website, could “cause significant disruptions to financial markets.” If the debt ceiling were to be breached and those fears confirmed, it “would likely cause severe damage to the U.S. economy,” the White House states. According to Treasury Secretary Janet Yellen, the government would have run out of money and been forced to shut down on June 5; failing to come to a swift resolution on the debt ceiling would have had extreme ramifications.


After all the deliberation, members of Congress had 72 hours to consider an expansive debt ceiling bill and all of its concessions before voting on May 31st. Most notably, the bill suspends the $31.4 trillion debt limit until 2025. Other provisions include limits on non-defense spending, the redirection of unused COVID-19 relief money, and cuts to the IRS, while protecting veteran wellness initiatives. All things considered, the bill appears to be the epitome of a compromise.


A resolution was eventually codified on June 3rd. President Biden signed the hastily put-together package, which passed through the House with a bipartisan majority. Interestingly enough, more Democrats voted for the package than members of majority leader McCarthy’s own party, marking a bittersweet win for him.


While certainly a success, the entire controversy has lessened the faith of the world in US credit. Fitch Ratings, a company that provides credit ratings, has announced that the debt ceiling conflict could negatively impact the excellent ratings Treasury bonds currently hold. This means that government securities, often a safety net for cautious investors, could be deemed much riskier than they have been in previous years. It also implies that the dollar’s position as the reserve currency of the world could be in great danger.


While a crisis was averted this time, politicians are already looking towards the next time they will have to address the debt ceiling. The debt limit has been suspended until 2025, making it a non-issue for the presidential election but still a prominent discussion point in the near future.

 

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