U.S. House Voters To Raise Debt Limit, But Next Step Is Not Clear

Lawmakers in the U.S. House of Representatives voted 217-215 last Wednesday, April 26 to approve Speaker Kevin McCarthy’s (R-Calif.) bill to raise the federal debt limit, reduce federal spending, and enact infrastructure permitting and regulatory policy changes.

As Connected the Dots noted last week, the Metals Service Center Institute supports the permitting and regulatory policy changes included in the legislation.

White House officials reacted quickly to the House vote, however, saying the outline as written, which was opposed by every House Democrat, has no chance of becoming law. President Joe Biden prefers that Congress raise the debt ceiling without conditions, and confirmed last week that he has no plans to meet with Speaker McCarthy to hash out a compromise bill until he reconsiders the spending cuts including in the outline.

As a reminder, if Congress does not address the debt limit, the federal government within the next six weeks to two months, the federal government will be unable to pay its bills, resulting in a first-ever default by the U.S. government — an outcome that potentially could be catastrophic for the U.S. and larger global economy. Specifically, a default would raise interest rates on credit cards, mortgages, and other loans for businesses and families.

Why?

As the U.S. Chamber of Commerce has explained, the U.S. economy and global financial system are all underpinned by the idea that the U.S. government, unlike other governments around the world, always pays its bills. Investments in U.S. debt are considered “risk-free,” which means the federal government pays less to borrow money. All other debts and their interest rates are based off the risk of that debt relative to risk-free treasuries.

These factors are also the principal reasons the U.S. dollar is the global reserve currency, giving the U.S. both economic and national security advantages (advantages that China, for example, is looking to undermine through a competitor to the dollar). Defaulting would mean that the U.S. government no longer always pays its bills. Treasuries would no longer be risk-free.  Interest rates for the government and everyone else would rise as the financial system tries to sort itself out. The role of the dollar globally would be weakened, perhaps permanently. Most analysts believe this would result in an immediate recession with long-term negative effects.