By Swann Collins, investor and consultant in global affairs – Contributor to Eurasia Business News, October 13, 2021

View on the US Congress, Capitol Hill, Washington D.C.. Photo credits : Swann Collins.

The US Congress agreed on Tuesday, October 12, to raise the US federal debt ceiling until the end of the year, providing respite for the world’s largest economy. Thanks to the sole support of Democrats (219 votes to 206), the House of Representatives adopted a measure which plans to raise the borrowing limit of the US Federal State by 480 billion dollars.

On Aug. 1, the limit was already reinstated around $28.5 trillion, the current level of total U.S. debt, a figure that includes debt held by the public and by government agencies, reports the Wall Street Journal on October 13.

It is not clear now how Congress will raise the debt ceiling again before the end of the year.

Already approved by the US Senate last week, this text will be sent immediately to President Joe Biden, who will promulgate it as soon as possible. This will allow the country to honor its payments until December, or even at the very beginning of 2022, removing the prospect of a US default with catastrophic consequences for the dollar and the US economy. If this measure had not been adopted, the US federal State would have found itself in insolvency as of October 18, warned the Treasury.

The adoption of the debt ceiling bill was the subject of an intense standoff in the US Senate, which finally approved this temporary solution last Thursday thanks to a very narrow Democratic majority. 

“We cannot allow partisan politics to hold our economy hostage, and we cannot allow the routine of paying our bills to turn into a political showdown, undermining confidence, every two years or every two months.” , had stormed the White House Press Secretary, Jen Psaki, in words sent to the Republicans.

What is debt ceiling ?

As the Wall Street Journal explains it, the US Congress limits how much money the US federal government can borrow, and once the limit is reached, lawmakers must raise or suspend the ceiling before the Treasury Department can issue more debt.

But a vote to raise the debt limit doesn’t authorize new spending. Raising the ceiling essentially allows the US Treasury Department to raise money to pay for expenses already authorized. About one-third of federal spending is discretionary, which US Congress approves through annual appropriations bills. The rest is automatic spending on programs such as Medicare, Medicaid and Social Security.

Republicans refuse to approve any long-term measure to raise the federal debt ceiling, because they claim that this would amount to giving Joe Biden a blank check to finance his vast investment plans and more money printing by the US Federal Reserve. These plans have yet to be passed by the US Congress, however, so raising the debt limit will be used only to repay sums already borrowed.

Senate Republican Leader Mitch McConnell is now urging Democrats to reach – on their own – a lasting solution by December through a complex legislative path. But President Joe Biden’s camp has so far refused to use this “too risky” maneuver for the federal debt. The bill approved on Tuesday therefore only postpones until the end of November a political battle that promises to be epic over the finances of the United States and policy choices.

Republicans voice severe critics against the Joe Biden’s vast spending package. Many fear that the large public spending, together with the expansive monetary policy of the US Federal Reserve, will fuel inflation and will make the dollar losing its purchasing power.

The showdown in Congress promises to be all the more tense as it will take place at the same time as the negotiations to approve a new budget before December 3. If Congressmen do not agree before that date, the US federal state funding will suddenly be cut (which is nicknamed “shutdown”), pushing hundreds of thousands of employees and private companies working on public projects into great financial difficulties. The high probability that the United States will return to the same financial uncertainty by December is far from reassuring institutions or the markets.

Democratic Speaker of the House Nancy Pelosi warned Tuesday: if the debt ceiling was not raised in a more sustainable way, the impact would be “enormous” and the United States would experience in particular “a loss of six million jobs ” . “A default would send a shock wave through global financial markets ,” she added. 

The US Federal State was able for decades to fund its spendings thanks to money printing policies of the US Federal Reserve and thanks to the large spread of dollars worldwide, avoiding inflation at home. But since the early 2000’s, the influence of the dollar, still strong, has been however decreasing in the world, exposing the US economy to the risks of inflation and devaluated national currency. The decisions of the US Fed in the coming weeks will be crucial.

Exchange rate as of October 13, 21:25 UTC : 1 USD = 0.86 EUR

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© Copyright 2021 – Swann Collins, investor and consultant in global affairs.