Education logo

Debt Ceiling Agreement And Its Implications

The Biden-McCarthy Accord and its Potential Impact on the Stock Market, Credit Rating, and Economic Stability

By Andre CoorePublished 4 months ago 4 min read

President Biden and House Speaker Kevin McCarthy have reached a fundamental accord to elevate the federal government's debt ceiling, a matter of utmost significance that, if unapproved by Congress, could have far-reaching implications on the global financial landscape. While the achievement of this agreement may initially appear triumphant, astute investors understand the need to delve deeper into the concept of an "agreement in principle" and its potential ramifications for both the stock market and the global economy in the weeks that lie ahead.

Let us embark on a journey to unravel the intricacies of this agreement, the road that lies ahead, and the potential repercussions should the debt ceiling fail to be raised. McCarthy and Biden have concurred on a two-year elevation of the debt ceiling, currently set at a staggering $31.4 trillion, effectively extending the borrowing limit beyond the 2024 presidential election. Additionally, this compromise entails temporary spending caps, work prerequisites for social safety net programs, and provisions to expedite energy and gas projects.

It is worth noting that the United States and Denmark stand as the sole two nations adhering to a debt ceiling policy. However, Denmark's lofty debt ceiling renders it impervious to significant economic implications. In contrast, the United States President possesses the authority to propose new budgets, programs, expenditures, and taxes. Nevertheless, any new spending or tax propositions necessitate the approval of Congress. If these programs fall within the confines of the debt ceiling, they are deemed acceptable. However, excessive spending coupled with inadequate revenue could precipitate a default on U.S. debt obligations.

A default scenario entails an inability on the part of the government to fulfill its financial obligations, akin to an individual failing to meet credit card or mortgage payments due to insufficient income. In such circumstances, one must either secure personal loans or risk the perils of bankruptcy if loan approval is unattainable. Similarly, the United States would be unable to honor its financial obligations if Congress fails to grant the debt ceiling increase. However, it is imperative to note that an agreement in principle between Biden and McCarthy is merely the beginning of this saga.

The title of this discourse emphasizes the necessity for vigilance in the days that lie ahead due to the initial disagreement between the House of Representatives and the President. The House sought fiscal restraint, eschewing what it deemed superfluous programs and expenditures that would exacerbate the nation's debt burden. The objective of these negotiations was to address the President's requisites while considering the House's demands, as it represents one of the two Congressional chambers. However, with the attainment of this agreement in principle, the ensuing challenge lies in rallying support from their respective factions within Congress.

Presently, the House is predominantly Republican, advocating for spending reductions, while the Senate is predominantly Democratic, espousing more progressive programs. Democrats, however, perceive Biden's concessions in this recent negotiation as acquiescing to GOP demands. This disparity within Congress may engender further discussions and concerns following the Memorial Day Weekend of 2023.

The magnitude of this issue lies in its potential disruption of the global financial system. A failure to ratify the agreement in Congress would imperil Medicare and Social Security payments and cast doubt upon the United States' reputation as the most dependable global economy. As discerning investors, we must comprehend the implications. A potential default could unleash shockwaves upon the stock markets and substantially increase the cost of borrowing to finance Washington's fiscal deficits, thereby rippling through businesses and consumers.

The mere specter of a default has already instilled trepidation within Wall Street. A default, if realized, would engender an economic catastrophe, adversely affecting individuals across the socioeconomic spectrum. Business Insider, citing the Council of Economic Advisors, prophesies an impending crash, asserting that heightened volatility in equity and corporate bond markets would hinder firms' capacity to finance themselves and engage in the productive investments pivotal for sustaining the present economic expansion.

Therefore, our course of action as judicious investors mandates staying attuned to the latest developments. We should also consider the potential impact on the U.S. credit rating. Presently boasting a pristine AAA rating, the United States faces the prospect of downgrade should lawmakers fail to pass a deal. Credit rating agency Fitch has already cautioned that the debt ceiling brinkmanship jeopardizes the nation's rating, albeit with an expectation of resolution before the projected June deadline. A downgrade in the credit rating carries substantial consequences, making borrowing more arduous and potentially elevating interest rates.

It is worth recalling the parallels with the 2011 debt ceiling crisis, characterized by political divisiveness in the United States. At that time, Republicans, having gained control of the House of Representatives in 2010, seized the opportunity to push for spending cuts. Conversely, Democrats advocated for a balanced approach to deficit reduction, encompassing both spending reductions and increased revenues. The ensuing standoff engendered tense negotiations and political posturing, with the United States on the brink of defaulting on its debt. Ultimately, an agreement was reached through the Budget Control Act on August 2nd, 2011, which raised the debt ceiling while implementing spending cuts and provisions for further deficit reduction. Nonetheless, this crisis tarnished the reputation of the U.S. government and highlighted the escalating polarization and dysfunction in American politics.

In light of these historical events and the prevailing circumstances, we must remain vigilant and closely monitor unfolding developments. Understanding the intricacies of the debt ceiling mechanism and its purpose in the United States assumes paramount importance. By maintaining a well-informed stance, we, as discerning investors, can navigate the uncertainties with prudence and make sound decisions in light of the potential outcomes that lie ahead.

how to

About the Creator

Reader insights

Be the first to share your insights about this piece.

How does it work?

Add your insights


There are no comments for this story

Be the first to respond and start the conversation.

Sign in to comment

    Find us on social media

    Miscellaneous links

    • Explore
    • Contact
    • Privacy Policy
    • Terms of Use
    • Support

    © 2023 Creatd, Inc. All Rights Reserved.