Room to Breathe? US Senate Gets Its Act Together

Today, members of the Senate reached an agreement to put the pin back in the grenade - to reopen the government and extend the Treasury's ability to borrow money.  The agreement will fund the government through January 15, and it would raise the debt ceiling until February 7.  (For more on the debt ceiling, check out my previous post or Forbes' in-detail analysis.)

The Senate has assigned December 13 as the deadline for a detailed budget.  Check out The New York Times article "Senate Paves Way To End Debt Impasse." The article discusses that the deal wasn't pretty for either side, but that "the deal... yielded virtually no concessions to the Republicans."  Now, the Senate and the House are both working on translating the agreement into "legislative language."  Both are expected to vote tonight.

CNN's article "Senate reaches deal to end shutdown, avoid default," covers the story and includes a video.  

If you're curious as to what this means for stock investments, take a look at The Boston Globe's business spin, "Dow Surges on Debt Deal."  Like the title says, the Dow (Dow Jones Industrial Average - an important stock market index) surges with the Senate's agreement.

So, for now, we've avoided a modern-day dystopia... But I'm sure come January and February, we'll see a similar sticky situation.  

The Deal with Default and the Debt Ceiling

I apologize for the overabundance of political posts and (thus far) the lack of dystopian literature discussion.  But how often does our government shut down and how often do we face default?!

Here are some basic explanations to figure out what exactly default may mean and how important raising the debt ceiling is (take a look at the Sloan Sabbith video linked here and shown below if you're already an economic expert):

What is the debt ceiling?

Similar to a spending cap on a credit card, the debt ceiling limits national debt.  The debt ceiling limits the national treasury's ability to accrue debt - once the Treasury has reached the certain assigned amount, the government's spending cannot exceed its income.  

By the beginning of 2013, Congress was supposed to have agreed on a budget for the year.  The stalemate between parties extended the budget debate until March, when cuts were implemented.  These drastic cuts bought Congress time (from March until now) to work out a budget before the debt ceiling could be reached.  But they still haven't done their job.

What does raising the debt ceiling mean?  How would it help?

Currently, the US debt ceiling is $16.7 trillion.  The US will reach its debt ceiling of $16.7 trillion TOMORROW, estimates project.  Once we hit the debt ceiling, we can't borrow any more money and we would default on our loans.  Raising the debt ceiling would mean that we would increase the amount we allow the government to borrow - over $16.7 trillion - to give Congress time to get their shit together.

Like I mentioned in my previous post, the US Congress was discussing whether or not to raise the debt ceiling in 2011.  The mere discussion of possible default was enough to give investors cold feet.          

What does default mean for the country? 

If, by October 17 (TOMORROW!), we still haven't raised the debt ceiling, the government may be forced to default on its loans.  This could have multiple effects, better discussed in Forbes' article, "Debt Ceiling: Deadline to Default?"  In short, Forbes considers the possibility of default close to zero, but the article explores all other possible outcomes, which, this article states, would likely lead to a recurring default scare in the future.  Check the article out - Forbes knows what they're talking about.