Next week, June 1, the deadline for the United States to expand its ability to pay will expire which has already peaked.
The US Congress is the sole power to change the US government’s debt ceiling and if there is no agreement to allay this nation’s uncertainty, fear will grow and could eventually turn into panic. Also having an effect of the world.
How much is the debt?
US GDP is around current levels of $23 trillionbut the world’s largest economy has a debt ceiling of $31.4 trillionand it has already been achieved since January of this year.
This means that the total indebtedness of the country is 1.36 times higher than the Gross Domestic Product (GDP), that is, 136 percent. Which means that if the United States wanted its debts, it would not reach it by adding up all the final goods and services produced in the country.
It is as if a person wanted to pay off all their debts by selling all their assets (house, car, furniture, etc.) by adding the salary, and the money they get in a year but not enough.
According to Bloomberg, throughout In the past seven decades, the US debt ceiling has been raised 78 times.that means more than once a year, although they don’t happen every year.
Who depends on raising the debt ceiling?
The task is outside the Government of Joe Biden, the United States Congress is the only one empowered to modify the debt ceiling of the US government (upper debt limit).
The financial financing mechanism was introduced for the first time in the year 1917 and was ratified between 1939 and 1941. It is one of the few ways that the country has to cover the growth of items such as military spending or others.
In Congress, Republicans are demanding a sharp cut in public spending as a condition for increasing borrowing, but if disagreements persist, Biden has one recourse left: invoke the 14th Amendment to the US Constitution, which stipulates that «the validity of the public debt of the United States, authorized by law, (…) must not be questioned».In other words, the expenses already voted must be paid.
What happens if it is not paid?
Treasury Secretary Janet Yellen has said there would be “catastrophic” consequences of not authorizing an increase in the debt limit.
The possibility of a recession in the country would multiply, interest rates would rise, the collapse in the banking system could be generalized or at least spread to other institutions that until now have avoided it and US GDP would plummet along with that of the world.
Yellen said that «financial and economic chaos would ensue.»
The United States could no longer pay Treasury bondholderswhich are the refuge of world finance, spending should be prioritized, in this way debt payments and interest payments would be made first.
Veterans’ benefits and pensions could not be paid, there would be delays in the payment of salaries of millions of public sector workers, including teachers, and it would affect social security payments and health care subsidies.
In the scenario of a temporary default, however minimal, the White House has estimated that would cost the US economy about 500,000 jobs; that is, the increase in unemployment would be another consequence.
According to President Biden, «America has never defaulted on its debts. And that will never be the case.»
The other problem is that a decision made at the last minute could also have consequences, as happened in 2011 when there was only the threat of default and the United States lost its triple A credit rating.
And if it spreads?
If the default lasts about 6 months, would cause a drop in GDP of 6 percentwith the loss of some 8.3 million jobs.
By questioning the value of US bonds, the rest of the world could be thrown into a recession.
It could also cause the dollar to collapse, sending currency markets into chaos, while oil and commodity prices in general would skyrocket.
In a chaos scenario, world inflation would rise again and supply chain problems, which affected trade in the aftermath of the COVID-19 pandemic, could worsen due to a lack of confidence in the financial system.
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