Debt Ceiling News Today: What the "Clean" Deal Means for the U.S. Economy

Email
    Text size

Debt ceiling news 2014: The House of Representative passed a one-year extension to the United States' debt limit on Tuesday evening.

Sen. Majority Leader Harry M. Reid (D-NV) has already said he would pass the bill, although Sen. Ted Cruz (R-TX) may demand a 60-vote threshold on the deal. With U.S. President Barack Obama's signature, the nation would no longer face the threat of defaulting on its debt of $17.2 trillion within the next couple of months.

The deal passed by a narrow vote, 221 to 201, with just 28 Republicans supporting a "clean" extension of the country's borrowing power.

With a "clean" deal, Republicans were unable to attach any demands to the deal, such as improving veteran benefits or delaying the individual mandate on the Affordable Healthcare Act.

Here's what this "clean" deal means for Congress, and what's next.

The Next Step in the Debt Ceiling Deal

The agreement is a welcome surprise to investors, who now will not have to deal with Washington uncertainty until after the 2014 mid-term elections.

But this deal doesn't eliminate problems down the road.

Hours before the vote, the head of the Congressional Budget Office told the Senate Budget Committee that the "large and growing federal debt" increases the likelihood of "fiscal crisis."

"The large budget deficits recorded in recent years have substantially increased federal debt, and the amount of debt relative to the size of the economy is now very high by historical standards," Douglas W. Elmendorf testified.

And although Janet Yellen signaled no increase in interest rates is pending, the nation will face incredible service costs once rates do rise in the next few years. Should the U.S. debt hit $20 trillion in the next few years, the nation would pay $1 trillion each year in interest at a 5% rate.

So why did Republicans agree to this clean debt ceiling deal?

GOP Debt Ceiling Strategy

Republicans learned the hard way in a game of chicken with President Obama in October 2013 over how to play the debt ceiling. At the time, Republicans allowed a government shutdown over the budget, and it cost them dearly in the eyes of the American public.

This time, their strategy was different.

Republicans argued that President Obama has created more debt in five years than all previous presidents from the birth of the nation until 2003. With more than $6.67 trillion in debt added since the president took office, Republicans decided to provide Democrats with whatever they wanted and then focus on the upcoming elections.

Republicans will now use the next eight months targeting seats over the failed launch of President Obama's healthcare law, ongoing economic struggles for Americans, and rising debt levels that threaten the economy over the long term.

The United States will likely be at least $18 trillion in debt by March 2015, the next time Congress will have a debt ceiling debate. By that time, the 2016 election will be in full swing, forcing the Democratic candidate to defend the free-spending policies of the Obama administration, while the Republican candidates begin to focus on the unsustainable spending practices of the U.S. government.

While the current debt ceiling showdown is over, the long-term budget battle rages on.

Profit Alert: Alibaba's IPO is one of the most anticipated in years, but there's a better way to invest in China's e-commerce boom, before the IPO hits the market...