House Republicans will vote tonight on a bill to raise the current $14.3 trillion federal debt ceiling by another $2.4 trillion, according to House Majority Leader Eric Cantor. Though the government hit the debt ceiling on May 16, it still has buffer time until August 2 to avoid defaulting on its payment obligations. However, smooth execution of the bill to raise the debt ceiling depends on the outcome of tonight’s vote.
The bill needs a two-thirds majority to pass. That implies that out of the total 432 House members, 288 votes in favor of raising the debt ceiling would be necessary to pass the bill. After Republicans won the House majority in the November 2010 midterms, there are only 192 Democrats in the House. Hence, if all House Democrats vote to elevate the debt ceiling, another 96 Republicans’ votes would be required to pass the bill.
While the Republicans are against raising the debt ceiling until the government succeeds on Medicare funding cuts and other budget reductions, Democrats want lower scale spending cuts to keep economic recovery in force.
With no spending cuts mentioned in the bill, it is most certain that the debt ceiling raise will not get the required number of votes.
On the other hand, the government is probably left with only one way to keep the country solvent — to raise the debt ceiling as soon as it can.
The What, Why and When of Debt Ceiling
What is the debt ceiling? It is an upper limit on the amount of debt the federal government can borrow to operate economic activities of the country. A law for debt ceiling was passed by the Congress in 1917 to simplify access to funding.
The primary purpose for setting the debt ceiling is accounting assessments, which are required to control the budget deficit. Based on policies and related costs, the government settles on the amount it needs to borrow for a given period. Accordingly, it sets the debt limit, which theoretically keeps spending in check.
According to the Congressional Research Service, the debt ceiling has been raised 74 times since March 1962. The ceiling was last set at $14.3 trillion in February 2010.
What’s the Risk?
If the ceiling isn't raised during the buffer time, the authority would be precluded from borrowing any more funds. Then, the country, which is already neck-deep in loans, would be in a fix. Funding its operations and paying creditors would then be out of the question. The rippling effects of lapsing loan obligations would ultimately push the country back into recession.
Almost all the listed U.S. companies, including major banks like JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Citigroup Inc. (C) and Bank of America Corporation (BAC) would lose access to markets and investors if the debt ceiling isn’t raised.
Additionally, this would drag down America's credit rating, making it difficult for the country to continue borrowing money from other nations. America would land up in a serious debt crisis, perhaps akin to Greece, Mexico and Argentina — countries that are still struggling to even out.
Is There a Feasible Way Out?
It is almost certain that the debt ceiling bill will not gain two-thirds majority in tonight’s vote. But once the extended period is over, Congress will have to raise the debt ceiling to avoid a recurrence of the financial crisis. So the U.S. economy is still on pins and needles. However, if we do a quick recap, lifting the debt ceiling will once again clear the economic mess resulting from the debt issue for the next few years.
Raising the debt ceiling is just an immediate solution. After a period of time, this will again raise concerns related to debt escalation instead of providing a debt solution.
Finding a long-term solution to the debt issue is no easy task, considering the state of economy. It requires balancing of fiscal policy measures, without which the country will have no other option but to raise the debt ceiling. What is needed now is the implementation of a strategy to take the debt load off the country.
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