The US has raised its debt ceiling, meaning the government can borrow money to pay off debts already incurred. The lifting of the debt limit, which currently stands at $31.4tn, follows a months-long drama that had brought the country to the brink of an economic crisis. Republicans had resisted the raising of the borrowing limit until Democrats agreed to a spending cut. While the passage of the legislation averted a crisis, it has proved controversial, with environmental regulations being relaxed and new job requirements being added for some elderly recipients of food aid. The 99-page bill was supported by more Democrats than Republicans in both chambers of Congress.
Additional Piece:
Why the US Debt Ceiling Debate is Critical for Investors
The debt ceiling debate in the US has been an ongoing cause of concern for investors worldwide, causing disruption in financial markets and impacting global economies. For investors, understanding the dynamics and implications of the debt ceiling is critical for making informed investment decisions and protecting their portfolios.
The debt ceiling is a legal limit on the amount of money that the US can borrow to pay its expenses, including social security, military, and interest payments on previous debt. Once the limit is reached, the government is unable to borrow any more funds, leading to a potential default on its payments. This creates instability in financial markets, as investors lose confidence in the government’s ability to fulfill its obligations, leading to a drop in the value of the US dollar and higher interest rates.
The US government has raised the debt ceiling almost 80 times in the past, and failure to raise it has had severe economic consequences. In 2011, a similar impasse between Democrat and Republican lawmakers led to a downgrading of the US credit rating, wiping out billions of dollars of wealth from the markets.
Investors are now closely watching the implications of the latest raising of the debt ceiling, as it is expected to impact the US economy’s long-term growth prospects. While the current lifting of the debt ceiling has averted a financial crisis, the new spending restrictions and relaxed environmental regulations pose significant challenges for investors.
For example, the natural gas pipeline in Appalachia approved under the new legislation is controversial, as some Democrats oppose it. This could lead to political and social unrest, creating risks for companies operating in the region and affecting investor confidence. Furthermore, the new jobs requirements for elderly recipients of food aid could impact the economy’s productivity, creating further challenges for investors.
Despite the challenges, the raising of the debt ceiling provides long-term stability for investors in the US. The fiscal targets for the next two years in the new legislation aim to ensure fiscal stability, while the lifting of the debt ceiling until 2025 provides investors with a sense of certainty.
However, investors must still remain vigilant and monitor the situation closely, as the US debt ceiling issue remains at the forefront of political and economic discourse. Investors must be prepared to make informed decisions based on the latest developments and reduce exposure to potential risks to their portfolios.
Summary:
The US debt ceiling has been raised, meaning the government can borrow money to pay off debts already incurred. The raising of the debt limit followed a months-long drama that had threatened an economic crisis and was brought about due to disagreements between Republicans and Democrats over spending cuts. The new legislation introduces job requirements for some elderly recipients of food aid and relaxes some environmental regulations, including approving a controversial natural gas pipeline in Appalachia. The legislation was supported by more Democrats than Republicans in both chambers of Congress. Investors must monitor the situation closely.
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It was a decidedly low-key conclusion to a months-long drama that unsettled financial markets at home and abroad and distressed anxious pensioners and social organizations create contingency plans in case the country were unable to pay all of its bills.
Instead of holding a public ceremony with lawmakers from both parties to demonstrate bipartisanship, which Biden had cited an address in the Oval Office On Friday night, the President privately signed the bill, reflecting the tight deadline facing the country’s leaders.
The Ministry of Finance had warned that the country would run out of cash on Monday, sending shockwaves through the US and global economy.
The White House released an image of the President signing the law at the Resolute Desk. In a brief statement, Biden thanked Democratic and Republican congressional leaders for their partnership, a heartfelt message that contrasted with the rancor that originally characterized the debt debate.
The standoff began when Republicans refused to raise the country’s borrowing limit unless Democrats agreed to a spending cut. Finally, the White House started weeks intensive negotiations with Speaker of the House Kevin McCarthyR-California to reach an agreement.
The final agreementpassed the house on Wednesday and the Senate on Thursday, suspends the debt ceiling until 2025 – after the next presidential election – and restricts government spending. It gives lawmakers fiscal targets for the next two years in hopes of ensuring fiscal stability as the political season heats up.
Raising the country’s debt limit, which currently stands at $31.4 trillion, will ensure the government can borrow to pay off debts already incurred.
After Congress passed the law, Biden took the opportunity to deliver his first speech in the Oval Office as president on Friday.
“No one got everything they wanted, but the American people got what they needed,” he said, emphasizing the “compromise and consensus” in the deal. “We averted an economic crisis and collapse.”
When re-elected, Biden praised the achievements of his first term, including support for high-tech manufacturing, infrastructure investments and financial incentives to combat climate change. He also highlighted how he had softened Republican efforts to push back his agenda and secure deeper cuts.
“We’re cutting spending while also cutting deficits,” Biden said. “We’re protecting key priorities from Social Security to Medicare and Medicaid to veterans and our transformative investments in infrastructure and clean energy.”
Biden’s remarks were the Democratic president’s most detailed comments on the compromise he and his staff negotiated. He largely remained silent in public during the high-risk negotiations, a decision that frustrated some members of his party but was intended to give both sides a chance to reach an agreement and give lawmakers a chance to agree with him.
Biden commended McCarthy and his negotiators for acting in good faith and all congressional leaders for ensuring the law passed quickly. “They acted responsibly and put the country’s well-being ahead of politics,” he said.
In addition to spending restrictions, the 99-page bill changes some policies, including introducing new job requirements for older Americans who receive food aid and approving a natural gas pipeline in Appalachia, which many Democrats oppose. Some environmental regulations have been changed to optimize approvals for infrastructure and energy projects — a move that moderates in Congress have long sought.
The Congressional Budget Office believes the legislation could actually do so Expanding overall eligibility for government food aidwith the elimination of work requirements for veterans, the homeless and young people exiting foster care.
The law also increases funding for defense and veterans, cuts some new funding for the Internal Revenue Service, and rejects Biden’s call to roll back Trump-era tax breaks for corporations and the wealthy to help cover the country’s deficits. However, the White House said the IRS’s plans to increase enforcement of tax laws for high earners and businesses would continue.
The deal mandates an automatic 1% overall cut in spending programs if Congress fails to approve its annual spending bills — a measure aimed at pressuring lawmakers from both parties to reach a consensus before the fiscal year ends in September.
More Democrats supported the bill than Republicans in both chambers, but both parties were critical of its passage. In the Senate the balance was 63 to 36, with 46 Democrats and Independents and 17 Republicans in favor, 31 Republicans plus four Democrats and one Independent standing with opposing Democrats.
The vote in the House of Representatives was 314 to 117.
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AP Congressional Correspondent Lisa Mascaro contributed to this report.
https://fortune.com/2023/06/03/biden-signs-debt-limit-bill-averts-crisis-economy-recession/
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