The Senate passed legislation Thursday evening to raise the U.S. $31.4 trillion debt ceiling and impose caps on government spending through the 2024 election, ending a drama that could have brought about a global financial crisis.

It now goes to the desk of President Joe Biden, who curated the deal with House Speaker Kevin McCarthy and plans to sign it just days ahead of what would have been a catastrophic US default.

The Senate voted 63-36 to approve the bill, but many on both sides of the aisle are stating their concerns about parts of the deal.

“If we do this we will not default,” Senate Majority Leader Chuck Schumer said just before the vote. “That is very, very important.”

Meanwhile, Senate Republican Leader Mitch McConnell wasted no time highlighting the next budget battle. “In the coming months, Senate Republicans will continue working to provide for the common defense and control Washington Democrats’ reckless spending,” he said in a statement.

This is telling.

Down-to-the-Wire Deal

So, let’s be clear: this down-to-the-wire deal struck this week to raise the debt limit – and only until January 2025 – does not solve the underlying political challenges facing the U.S. and its economy.

The main issue is that lawmakers in recent times have had, and continue to have, little incentive to reach agreement.

It’s an increasingly polarized political landscape, which is being amplified by algorithms and economic interests. I believe it’s a trend that will only intensify in the foreseeable future.

Indeed, with the country currently headed for a Biden-Trump rematch in 2024 – an election that Donald Trump could win – this political "agreement" is unlikely to be maintained for very long.

Standoffs becoming a frequent occurrence will risk more government shutdowns, more restrictions on central bank independence and more damage to the U.S., and therefore global, economy.

Using the country’s debt as a political weapon, undermines confidence of investors in the U.S. government amid concerns about the government’s ability to properly manage its finances.

This loss of confidence will mean that it becomes more difficult for the U.S. government to borrow money in the future, which could lead to higher interest rates and weaker economic growth.

Risks to US Dollar

Debt ceiling dramas also erode some of the current global reserve currency’s credibility and reputation as a "safety asset," which could have far-reaching repercussions for the U.S.

Also, as I recently argued in the media, debt ceiling crises are the “ultimate gift” for America’s major geopolitical rival, China, which is seeking to promote the internationalisation of its own currency and to position itself as a more stable and attractive investment option, in order to attract more international investment and capital inflows.

I'm in favour of debt ceiling reforms that take away the threat of a U.S. government default and all the implications of that, and reforms that make lawmakers in Washington truly accountable by automatically triggering spending cuts should the ceiling be reached.

However, I doubt such reforms will come to fruition as a debt ceiling gridlock is a useful political theatre for lawmakers – on both sides – keen to push agendas.

And with former President Donald Trump, who is known for steadfastness on issues of fiscal responsibility, almost certain to be the Republican nominee next year, we should expect debt ceiling-esque standoffs to become an even more predictable part of the political scene.
_______________
London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.