Is he coming default in the US? This week begins a countdown that will keep the markets in suspense, and as the days and hours pass towards June 1 without there being an agreement to dissipate that factor of uncertainty, fear will grow and could eventually turn into panic.
It is not the first time that this factor breaks in and causes instability; In fact, it is recurring. but more and more analysts and experts consider that it is a real “time bomb” which must be deactivated urgently because, otherwise, at any moment it could bring the largest economy in the world to ruin.
We are talking about the “Debt Ceiling”, as the mechanism that has led the United States to be considered the most indebted economy on the planet is known colloquially.
This factor is internal, but as we know, everything that happens in that economy affects or benefits the entire planet, not to mention Mexico.
Let’s know a little about what this factor is and why the world is worried.
Default in the US, more than a century of history
The United States Congress is the only one empowered to modify the debt ceiling of the US government (upper borrowing limit).
This mechanism was introduced for the first time in the year 1917 and was ratified between 1939 and 1941 as a financial financing mechanism.
The issue is that, to finance growth, military spending when necessary and various other items, the debt ceiling often has to be raised to carry out all that spending.
For this reason, the debt ceiling is already very far from being at the original level. It is enough to compare two figures to size the problem.
The GDP of the United States is around current levels of 23 trillion dollars, as we previously pointed out, it is the largest economy in the world.
But the debt ceiling amounts to 31.4 trillion dollars, and it has already been reached since January of this year.
This means that the total indebtedness of the country is 1.36 times higher than the GDP, that is, 136%. It means that in the imaginary that the country wanted to pay its total indebtedness with its GDP, this would be insufficient.
It is as if a person wanted to pay all his debts by selling all his assets (house, car, furniture, etc.) and with the salary or income obtained for a whole year, but all these resources were insufficient.
According to Bloomberg, over the past seven decades the US debt ceiling has been raised 78 times, that’s more than once a year, though there have certainly been periods when it wasn’t raised.
This would affect eventual non-compliance
Treasury Secretary Janet Yellen has issued dire warnings of the “catastrophic” consequences of not authorizing an increase in the borrowing limit.
The possibility of a recession would multiply, interest rates would rise to levels that are better not to imaginethe collapse in the banking system could be generalized or at least spread to other institutions that have so far avoided it, the US GDP would collapse along with that of the world, and many other consequences.
Yellen summed it up in one sentence on Thursday: “Financial and economic chaos would ensue.”
For example, a citizen-level effect would be that a lack of funds would force the US Treasury to prioritize spending, so debt payments and interest payments would come first.
This could mean delays in the payment of salaries for millions of public sector workers, including teachers.
Similarly, Social Security payments and health care subsidies for older and vulnerable Americansincluding military veterans, could be suspended.
Different default scenarios
In the scenario of a temporary default, however minimal, the White House has estimated that it would cost the US economy around 500,000 jobs; that is, the increase in unemployment would be another consequence.
If the default were prolonged, say more than 6 months, it would cause a 6 percent drop in GDP, with the loss of tens of thousands of companies and some 8.3 million jobs.
And another determining factor would come: the loss of confidence in the United States as a world power.
For example, investors would question the value of US bondsconsidered the safest investments on the planet, to the extent that they are the basis of the global financial system.
In the world, a default could severely weaken global trade and send the rest of the world into a deep recession.
If the default drags on any longer, it could send the dollar tumbling, throwing currency markets into chaos, while oil and commodity prices in general soar.
This chaotic scenario of analysts, reported in some media as Bloomberg and Wall Street Journalit is extreme, but the events registered especially in the present decade have made it clear to us that anything can happen.
For example, in a chaos scenario, global 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.
political conflict
Chaos is not good for anyone, in the United States they know it well.
As more than seven decades ago, it is very likely that at some point an agreement will be reached that will dispel the probability of scenarios such as those described above.
Basically, what happens is that this financial factor has been used more and more as a tool for political pressure by both Republicans and Democrats.
But bringing the country to chaos and ruin would be unforgivable.
However, even a foreseeable agreement, one more, does not solve the underlying problem, it only postpones it.
The United States is an excessively indebted economy, how long will it stay that way?
The risk is that at some point it becomes an uncontrollable factor, that there is no political agreement that can solve it.
It has been said for a long time that the United States “walks on the hairline” due to its excessive level of debt.
There will almost certainly be agreements, but the risks will remain latent, hopefully they will not come true one day.
By Antonio Sandoval
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High level Alto Nivel is the Mexican medium with more than 30 years of stories, content and news on the economy, finance, business and leaders.