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The Week in Business: The Debt Limit and Politics

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The USA hit its borrowing cap of $31.4 trillion on Thursday, setting the stage for a bitter fiscal fight in Congress over raising the limit. Treasury Secretary Janet L. Yellen said the federal government would take “extraordinary measures,” at the least until early June, to maintain paying its bills. Democrats and the White House, in addition to forecasters and economists, have warned that the nation risks a financial crisis and other dire economic scenarios if lawmakers don’t raise the limit before the Treasury Department exhausts its ability to purchase more time. But Republicans have said that they may not raise the borrowing limit again unless President Biden agrees to steep cuts in federal spending.

As the federal government continues constructing a case against the founding father of the cryptocurrency exchange FTX, Sam Bankman-Fried, more details are emerging concerning the workings of the exchange. Rivals said that Mr. Bankman-Fried often promoted digital currencies, referred to as “Samcoins.” Mr. Bankman-Fried was said to make use of his influence to steer people to purchase large quantities of the coins, inflating their value artificially, to make his crypto trading firm, Alameda Research, look healthier than it really was. (Mr. Bankman-Fried has denied accusations that he tried to control cryptocurrency markets.) Also, documents obtained by The Latest York Times show that FTX executives voiced concerns over the usage of customer funds within the weeks leading as much as the collapse of the firm.

Two of the tech industry’s biggest players announced last week that they might be cutting hundreds of jobs. Microsoft said on Wednesday that it could lay off about 10,000 staff, and Alphabet, the parent company of Google, said on Friday that it could lay off 12,000 employees. Across the tech industry, employers are pulling back after several years of frenetic hiring to fulfill the pandemic-fueled surge in online services. Nearly 200,000 tech staff have lost their jobs for the reason that start of 2022, based on Layoffs.fyi, which tracks job cuts within the sector. Even the industry’s power players have been affected: Apple is the one major firm that has not yet announced significant cuts. Satya Nadella, Microsoft’s chief executive, said on the World Economic Forum meeting in Davos, Switzerland, last week that “quite frankly, we within the tech industry may also should get efficient.”

Understand the U.S. Debt Ceiling

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What’s the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the overall sum of money that the federal government is allowed to borrow via U.S. Treasury securities, similar to bills and savings bonds, to meet its financial obligations. Because the US runs budget deficits, it must borrow huge sums of cash to pay its bills.

The limit has been hit. What now? America hit its technical debt limit on Jan. 19. The Treasury Department will now begin using “extraordinary measures” to proceed paying the federal government’s obligations. These measures are essentially fiscal accounting tools that curb certain government investments in order that the bills proceed to be paid. Those options may very well be exhausted by June.

What’s at stake? Once the federal government exhausts its extraordinary measures and runs out of money, it could be unable to issue recent debt and pay its bills. The federal government could wind up defaulting on its debt whether it is unable to make required payments to its bondholders. Such a scenario can be economically devastating and will plunge the globe right into a financial crisis.

Can the federal government do anything to forestall disaster? There is no such thing as a official playbook for what Washington can do. But options do exist. The Treasury could attempt to prioritize payments, similar to paying bondholders first. If the US does default on its debt, which might rattle the markets, the Federal Reserve could theoretically step in to purchase a few of those Treasury bonds.

Why is there a limit on U.S. borrowing? In keeping with the Structure, Congress must authorize borrowing. The debt limit was instituted within the early twentieth century in order that the Treasury wouldn’t must ask for permission every time it needed to issue debt to pay bills.

The Bureau of Economic Evaluation will release on Thursday initial estimates of economic growth in the US within the fourth quarter of 2022. The report on gross domestic product is prone to show that economic output, adjusted for inflation, increased at an annual rate of 1.5 percent within the quarter, based on predictions from forecasters. That will represent a slowdown from the rate of three.2 percent within the third quarter. The Federal Reserve’s campaign to rein in inflation by raising rates of interest is taking a toll on the economy, especially the housing market. Although consumer spending has slowed, the economy has shown surprising resilience after contracting in the primary half of last 12 months.

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