President Joe Biden and House Speaker Kevin McCarthy are meeting on Tuesday to discuss raising the debt ceiling to avoid a potential U.S. default on June 1.
What Is The Debt Ceiling? The U.S. debt ceiling is a restriction Congress has placed on how much money the U.S. government can borrow to pay its bills, such as the costs of military operations and social programs.
Because the U.S. regularly spends more money than it takes in, Congress must raise the debt limit on a frequent basis. Congress has changed the debt ceiling 78 times since 1960. It currently stands at $31.4 trillion.
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What Are The Proposals? Biden previously rejected a House Republican proposal to raise the debt limit by $1.5 trillion or through March 2024, whichever comes first. That proposal also included $130 billion in federal spending cuts for the upcoming fiscal year.
Biden has said he wants a clean debt ceiling increase that is not attached to any federal spending cuts. The administration has reportedly been evaluating potential emergency measures to circumvent Congress by declaring the debt limit unconstitutional and continuing to borrow above the current limit.
Republicans would likely challenge this approach as an overreach of executive authority.
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Why The Debt Ceiling Matters: If the U.S. does not raise the debt ceiling, the government would default on its debt. This would likely trigger a recession and create problems in the global economy.
If Biden and McCarthy reach some form of compromise, it could include some of the proposed government spending cuts from the Republican proposal, such as blocking the student loan forgiveness program that is currently being challenged in the courts.
If the student loan forgiveness program is nixed, it could be a bullish catalyst for student lending stocks such as SoFi Technologies Inc SOFI, SLM Corp SLM and Discover Financial Services DFS.
The Republican proposal also seeks to repeal green energy tax credits, such as the $7,500 in credit for buying a new electric vehicle. This could be bad news for Tesla Inc TSLA and the iShares Global Clean Energy ETF ICLN.
Benzinga’s Take: Raising the debt ceiling has become an increasingly politicized event in recent years, but Congress has not yet let the nation go into default just to gain political leverage. However, even if Congress ultimately avoids a default, uncertainty ahead of a last-minute deal could generate major volatility in the SPDR S&P 500 ETF Trust SPY.