Is the world on the verge of an economic disaster because of the American debt?

Is the world on the verge of an economic disaster because of the American debt?

 The United States has only 18 days to avoid a true economic catastrophe, not only domestically but globally.

And US lawmakers have a limited time to reach an agreement to raise the maximum amount of money the Treasury can borrow, or else the United States will intentionally default on its debts for the first time in history.

The current debt ceiling, unless it is raised, prohibits the United States from borrowing more than the $28.4 trillion ceiling.

The issue usually raises differences between the Republican and Democratic parties. The debt ceiling has already been raised 80 times since the 1960s.

What is the debt ceiling?

Simply, the US government, like the rest of the world, borrows when it spends money whose value exceeds the amount of revenue, by issuing treasury bonds.

The debt ceiling, set by Congress more than 100 years ago, is the maximum amount that the government can borrow, which is currently, as noted, $28.4 trillion.

The ceiling represents the maximum that the state can not exceed in borrowing, and therefore it has to rely on its cash to meet its payments, from military salaries to letters of credit.

sovereign debt

The US government annually issues dollar-denominated treasury bonds for borrowing, by offering them to the market at a certain interest.

These bonds can be purchased by foreign countries, individuals, corporations, bodies, and local institutions within the United States.

The level of US government debt is currently at just under $28.5 trillion, or about 29 percent more than the value of this year's gross domestic product.

About a quarter of that money is owed by the government to itself, with the Social Security Administration investing 2.9 trillion of its surplus earnings in government bonds, and the Federal Reserve holding more than $5 trillion in US Treasuries.

In contrast, foreign countries, companies, and individuals hold $7.5 trillion in US government debt, with Japan and China being the largest investors with $1 trillion each.

The rest of the bonds are owned by US citizens, corporations, and states and local governments.

Why was borrowing stopped?

Prior to 1917, Congress authorized the government to borrow a fixed amount of money for a fixed period, and when the loan was paid off the government could not borrow again unless it was allowed to do so.

This changed after a new law was enacted in 1917 that capped debt and allowed for a continuous extension of the borrowing process without congressional approval.

Congress enacted this measure to allow then-President Woodrow Wilson to spend money he deemed necessary to fight World War I without waiting for legislators who were often absent, or unable to attend, due to distances between states and difficult access.

However, Congress did not want to write a blank check to the president, so it limited the borrowing at $11.5 billion, and stipulated that there be new legislation if the amount was to be increased.

Since then, the debt ceiling has been raised dozens of times, and suspended on several occasions, most recently in August 2019, when Congress suspended the limit until July 31, 2021.

default

A default by the world's largest economy, which is a precedent, will have dire consequences, with repercussions for the entire global economy.

Internally, the failure to raise the debt ceiling will lead to the possibility of not paying the salaries of government employees or contractors contracting with it, as well as it may stop granting loans granted to small businesses or university students, and stop the motives of the bills owed, which technically means that it is in a state of default.

The default is also expected to cause the United States to slide into an economic recession caused by a drop in gross domestic product of about 4 percent.

It will also lead to the loss of about six million jobs, which will cause a rise in the unemployment rate and reach about 9 percent.

Externally, this backwardness will have dire economic consequences, as it will lead to higher interest rates and a decrease in the value of the dollar against other global currencies, causing global markets to panic and possibly stagnate.

The recession will push American consumers and companies to reduce the amount of goods and services they buy from abroad, meaning emerging market countries that depend on exports to the United States for a large portion of their income will be hit hardest.

The expected depreciation of the dollar will also have a similar effect, as it will make it more expensive for American companies to purchase supplies from abroad, and thus reduce the volume of trade exchanges worldwide.

The depreciation of the US currency will affect countries whose economies are pegged to the dollar, which will see a decrease in the purchasing power of their current stock of currency.

partisan struggles

Last week, US Treasury Secretary Janet Yellen warned of possible financial catastrophes that could inflict on the country if the debt ceiling was not raised and the United States was unable to repay its debts by the deadline.

"Within days," Yellen said, "millions of Americans will be out of cash, and about 50 million senior citizens may have their Social Security checks lost. Soldiers' salaries may stop."

Yellen recalled the 2011 debt crisis, noting that the policy of putting the United States on the brink of the debt ceiling "brought America to the brink of crisis."

Yellen stressed that acting as quickly as possible would enable the country to avoid the worst outcomes of 2011.

During the crisis over the debt debate under former President Barack Obama, the United States was closer than ever to default.

This prompted Standard & Poor's to downgrade the US debt rating to "AAA", causing a shock in the markets.

Yellen said that would "undermine confidence in the dollar as a reserve currency" and as a "safe haven". "We will be facing a fabricated crisis that we have imposed on this country, which is going through a very difficult period and is on its way to recovery," she added.

Republicans in the US Senate insist on refusing to support any increase in the debt ceiling or suspend the implementation of this ceiling, although they lobbied in this direction under former President Donald Trump.

On Monday, they blocked the Democrats' attempt to agree to suspend the ceiling for a period of 14 months with an interim budget.

Senate Republican Leader Mitch McConnell is using the debt ceiling as a political tool to protest President Joe Biden's spending plans.

Raising the debt ceiling does not increase spending, but simply allows the Treasury to fund projects previously approved by Congress, including trillions of dollars in aid decided upon during the COVID-19 pandemic.