The US Congress has temporarily halted a game of brinkmanship regarding lifting the debt ceiling, which is a limitation on the amount the US government may borrow.

Janet Yellen (Treasury Secretary) had advised Congress that the country would hit its ceiling by 18 Oct.

Republicans dared Democrats not to end the war. Democrats called this reckless. This confrontation sparked fears about a default in the national debt.

With the deadline just days away Congress voted to extend debt limits through December. This puts an end to the drama that has been going on for the past few weeks.

While a default in the United States is not likely and has never occurred in American history, it can have disastrous consequences for the US as well as the global economy.

Washington politics has been in a tight spot over the debt limit for a while, but there was some concern about financial markets amid slowing economic recovery due to the Covid-19 pandemic.

This is what you should know about the Debt Ceiling debate.

US government is spending more money than it receives in tax revenue, and so borrows to cover the gap.

The US Treasury issues bonds that can be borrowed. The US government bonds are considered one of the most secure and reliable investments in the world.

Congress set a ceiling or aggregate limit on the amount of debt that can be accumulated by the government in 1939.

On more than 100 occasions, the ceiling has been raised to enable the government to borrow even more. The ceiling is often acted upon by Congress in a bipartisan way and rarely becomes the focus of a political dispute.

However, as the country becomes more bitterly divided, legislators have turned the debt ceiling vote into leverage over other issues.

The last time that the US was seriously in danger of falling over a “debt cliff” was 2013, when Republicans erected a blockade against President Barack Obama’s spending plans.

If history is anything to go by, legislators tend to back down in the last hour. It appears that this was the case once again in October.

For the first time ever, sometime in the second half of October, the US would have defaulted on its debts – which currently stand at around $28tn (£21tn).

This would lead to delays in service adjustment for every government program currently offered, as well as affecting funding federally for specific states.

According to Goldman Sachs, the US Treasury will need to stop more than 40% of anticipated payments and financial assistance to US households.

Last week, The Pentagon published a statement in which it expressed concern about the possibility that Service members might not get their full pay on time.

The default may cause an increase of interest rates. It could ruin America’s creditworthiness. In turn, this would make America more costly to live in and lead to economic damage. This would cause turmoil in the stock market.

Last month Secretary Yellen, in an opinion piece published by Wall Street Journal, warned that the US would be “permanently weaker” if it did not raise the debt ceiling.

A temporary suspension or raising of the debt limit is dangerous for the economy and could lead to a worsening of the once-in a century global health crisis.

Global investors may decide to sell assets that are US-related and lessen their trust in the US dollar. The US has been the reserve currency of the world for many decades.

International Monetary Fund has called for an end of Washington’s “counterproductive bordermanship” regarding the debt limit. The IMF also recommended that the debt ceiling be removed and replaced by an alternate financial system.

Yesterday, President Joe Biden condemned the “hypocritical and dangerous” Republican opposition.

Biden stated that it was “playing Russian Roulette” with the economy.

While there are fifty Democrats in the Senate to vote on the debt ceiling, the Senate requires at least 10 Republican votes in order for them to be able pass it.

Democrats point out that the Debt Ceiling is raised to pay off current obligations, not for new ones. And that Biden’s policies contributed only 3% to existing debts.

It is also mentioned that during the term of Donald Trump, Mr Biden’s predecesor, they were able to join with Republicans in raising the debt ceiling 3 times.

Sen. Republicans in the Senate have stated that raising the debt limit was the Democrats’ sole responsibility, since they control both the White House (and both the chambers) of Congress.

New spending proposals, which Democrats want to make without Republican support through “budget reconciliation”, frustrate them.

Last month, Minority Leader Mitch McConnell said that his party would not support another reckless and partisan spending spree.

McConnell, along with other leaders of the party, believes that Democrats should use reconciliation in order to reach their economic policy goals. They can then use this to address the debt ceiling.

Democrats are concerned about the use of reconciliation.

Two attempts by the Senate to raise the debt ceiling through regular order failed. Last week, McConnell offered an agreement that the Democrats accepted.

As part of the offer, Republicans will come along with Democrats to raise the debt ceiling by a set amount – $480bn (£352bn) – to ensure bills are paid through 3 December.

While some Republicans (including former President Donald Trump) have complained that it amounts to “folding the Democrats”, the temporary measure passed both chambers.

To avoid default, Congress must still vote in December under the terms of the agreement.

Both parties will have more time for their remaining issues.

McConnell immediately after passing the bill in the Senate sent a message to President Biden pledging to continue providing assistance if his all-Democrat government gets into an unavoidable crisis.

Separately, lawmakers passed a short-term bill that would keep the government funding until December. So there could be another round of holiday headaches.


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