US Debt Default: Are We Really at Risk of a “Global Economic Crisis”?

As in many cases since the 1960s, the United States has reached its debt ceiling. Republicans are using this economic event to force Democrats to negotiate social spending and are currently blocking any talks to raise the ceiling. If this political battle fails, economists fear a default that could destroy the economy of the world’s richest country and spark a global financial crisis.

What’s going on with US debt?

On Thursday, January 19, 2023, the United States reached its debt ceiling, the maximum it can borrow to run the country. The current limit of $31 billion has just been exceeded. This situation is by no means exceptional: the US debt ceiling has changed many times since 1960 – Congress has every right to raise it if necessary.

But how often it is the confrontation between Democrats and Republicans that threatens the functioning of the country. A very thin Republican majority in the House of Representatives is refusing to vote for this increase because they want to use this opportunity to pressure Democrats for several spending cuts, in particular on social measures, caused by the implementation of the Joe Biden program. .

This political battle between the two camps has resurfaced regularly for the past thirty years. This time around, however, Congress is not only deeply divided, but the Republican Party itself is at the throat of extremist factions, including a parliamentary group called the Freedom Forum. Arch-conservative, anti-fiscal (for example, he is strongly opposed to the Obamacare health insurance system) and sometimes a libertarian, the latter could refuse to negotiate with the Democrats.

What is the risk of non-payment?

Nobody knows exactly what will happen because the United States has never gone into default before. But Janet Yellen, US Treasury Secretary, spoke from Dakar on Friday, January 20, to warn against what she believes could become, if political talks fail, a “global economic crisis.”

Initially, a default would “definitely cause a recession in the United States” due to “the inability to make payment, whether it be our debt obligations, social spending by beneficiaries or our military,” she told CNN. “Our borrowing costs will rise and every American will see their course follow the same trend,” she elaborated, stating that “many Americans will lose their jobs.” a stable currency deal could thus spread a recession, as happened in 2008.

In the fall of 2011, under the presidency of Barack Obama, the imminent threat of default on debt payments (which ultimately did not happen) was enough to bring down financial markets and downgrade the US rating on the S&P agency. From the highest possible rating of “AAA”, he rose to “AA +”. This “degradation reflects our view that the effectiveness, stability, and predictability of American policies and political institutions have been weakened,” the agency said at the time. Since then, the United States has never regained its triple A.

What is the solution?

In order to be able to meet financial commitments and commitments already authorized by Congress without entering into an imminent default, the US Treasury Secretary announced on Friday the imposition of “emergency measures.” That is administrative sleight of hand, which buys time for the government. The United States, for example, will temporarily stop payments to several pension, health care, or disability funds for government employees and former military personnel, as well as establish a “debt issuance suspension period.” These combined measures should allow them to delay the default date until June 5th. After that comes the big unknown.

A somewhat mystical “platinum coin” proposal has even surfaced: some are suggesting that the Treasury Department mint a $1 trillion platinum coin, which would give the government more time. But Janet Yellen rejected this unrealistic idea, which had already been brought up for discussion and then rejected many times since 2011 to avoid political negotiations.

Thus, the only long-term solution lies in negotiations between Republicans and Democrats in the House of Representatives before June 5, otherwise the American economy could collapse this summer.

Where are the negotiations?

In 2021, the last time the US hit the national borrowing limit, the two sides reached a short-term deal to raise the debt ceiling by $2.5 trillion, two weeks before the payment defaulted.

This time around, “Speaker” Kevin McCarthy is demanding that Democrats grant Republicans spending cuts to garner their support. “We need to change the way we spend money unnecessarily in this country, and we will make sure that happens,” he said. On Friday, January 20, President Joe Biden promised Republicans to have a “honest debate” on how to deal with the growing national debt. “I accept your invitation to sit down and discuss a responsible increase in the debt ceiling to address irresponsible government spending,” McCarthy subsequently responded in a statement posted on Twitter.

Their meeting in the evening was confirmed by the White House, the date is still unknown. “Raising the debt ceiling is non-negotiable,” White House spokeswoman Karine Jean-Pierre said firmly, adding that “this country and its leaders have a duty to avoid economic chaos.”

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