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What is the US debt ceiling and why does it matter that lawmakers reached a deal?

Actions rose in London on Thursday, and the pound rose against the dollar after US lawmakers in the House of Representatives passed a new bill on the country’s debt ceiling.

The bill, which suspends the ceiling, was passed by both Democrats and Republicans supports it, and will head to the US Senate for final approval.

The House — which is controlled by Republicans — was widely seen as the bigger obstacle of the two chambers of Congress.

London’s FTSE 100 rose 0.2% to 7,462 points before the US markets opened at around 14:00.

One pound could be bought for about $1.25, which is a third of a percent higher than the day before.

But what is the debt ceiling, and what would happen if the US reached it? Below are answers to some common questions.

What is the debt ceiling rule?

The US imposed the debt limit in 1917 at what today looks like a tiny $11.5 billion.

At the time, they created it to make the process of borrowing money easier – until then, Congress had to pass new legislation to approve all loans.

Instead, by limiting borrowing, he allowed the executive branch Govt more flexibility in what and when he borrowed, as long as he did not borrow more than the ceiling.

What is the current debt ceiling?

The ceiling has been raised many times over the past century since its introduction, reaching $31.4 trillion.

Historically, this has mostly happened without much drama — after all, Congress gets to vote on government spending during budget negotiations.

But since the mid-1990s, US Republicans have repeatedly used the debt ceiling as a lever to pressure Democratic presidents to make spending changes.

What did the June 1 deadline mean?

The Treasury initially set a June 1 deadline for raising or suspending the debt ceiling, but last week extended it to next Monday.

This term is not as inflexible as it may seem at first glance. Instead, it’s more like an estimate of when the U.S. might hit a ceiling.

The debt limit was raised by $2.5 trillion in 2021 to just under $31.4 trillion, but by January of this year, the US Treasury Secretary Janet Ellen said that the government intends to reach this limit.

Since then, it has taken steps to keep the money as long as possible, using various tools to avoid default.

That meant issuing hundreds of billions of dollars in promissory notes, using the hundreds of billions in cash the government had in its accounts, and using the taxes it had collected in recent months.

The deadline is not set in stone either. If the government can carve out a few more weeks and make sure it has enough cash by June 15, there will be another injection into the coffers as the next tax deadline approaches.

What is needed to raise the debt ceiling?

A bill to raise the debt ceiling must win a majority vote in both the US Senate and the House of Representatives.

The Senate is controlled by Democrats, so any increase Joe Biden wants to get will likely go there. But the Republican-controlled House of Representatives is a bigger obstacle.

Chairman of the Republican Chamber Kevin McCarthy also very weak. It took him 15 tries to convince enough Republicans to vote him for speaker.

Therefore, he cannot afford to lose the support of more than a few of his colleagues, including some on the extreme fringes of the party.

What would happen if the debt ceiling were reached?

The US government will not actually have enough money to pay all its bills. That doesn’t mean he can’t pay the bills.

Evidence suggests that he would suspend payments on the first day after running out of money, then wait until he had saved enough money to pay all of the first day’s bills before starting to save again until he could pay the second day’s bills. and so on.

What are the economic consequences of reaching the debt ceiling?

Ultimately there is much more than can be summarized here.

It will also depend on how long the situation will continue. In early May, Alec Phillips, chief US political economist at Goldman Sachs Research, warned that a delay of more than a few days would result in huge sums of money being pulled from the US economy, which could easily push the US into recession.

Even getting close to the deadline can create problems. In the 2011 debt ceiling battle, Standard & Poor’s downgraded the U.S. credit rating even though the deal was reached a day before the deadline.

“Economically, it is not difficult. That would just be bad,” Mr Phillips said.

He said the short delay, in direct economic terms, would cost about $10 billion a day.

The Congressional Budget Office and the U.S. Treasury Department estimated that any fight could cost 200,000 jobs in the third quarter of the year, a short default would put half a million out of a job, while a prolonged default would result in the loss of 8.3 million jobs and the reduction of 6.1 % of GDP.

The economic effects will also be felt around the world, as much of the global economy is based on the US financial system.

https://www.independent.co.uk/business/what-is-the-us-debt-ceiling-and-why-does-it-matter-that-lawmakers-have-reached-a-deal-b2349703.html

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