The United States’ non-compliance is not as dire as its consequences. It can lead to panic on the stock markets, an economic crisis and a drop in oil prices. Photo: video frame
On big screens around the world – another action-packed thriller series dedicated to the US breach! Will the largest economy on the planet manage to avoid bankruptcy? And how could this affect Russia? Don’t miss the outcome of the main event in the world of finance! Only this summer. There may not be a sequel…
FOR A WIDE FOOT OR WITHIN YOUR RESOURCES?
Default in the US will happen on June 1st! Unless, of course, we raise the debt ceiling. This was announced by the US Treasury Secretary, Jeannette Yellen, in a letter to the leaders of the US Congress, thus opening a new episode of this exciting series.
The action takes place in the United States, today. Democrats and Republicans discuss the debt ceiling again. There is such an internal limiter in America. So that the authorities get into debt, but consciously.
A little help. US budget spending is consistently higher than revenue. Therefore, Washington endlessly borrows money to pay for necessary expenses: health care, salaries of civil servants, defense, etc. One of the main ways to borrow money is to issue and sell government bonds. These are securities that are bought by ordinary citizens, as well as large companies and foreign governments. At the same time, the US Treasury is required to gradually redeem the bonds and also regularly pays interest on them.
– In 2022, interest payments to US government bondholders totaled $475 billion, representing 8.1% of budget spending. In 2023, the amount could grow to $700 billion, – calculated Evgeny Kogan, a professor at the Higher School of Economics.
The ceiling was introduced in 1917, when the United States was involved in World War I and needed money to support the Allies. Since then, the debt ceiling has been raised almost 100 times. And now it is 31.7 trillion dollars. For a moment, this is almost one and a half times the size of the entire US economy (for details, see “Just Numbers”).
The essence of the current dispute – however, like all previous ones – is simple. Democrats, including President Biden, are proposing simply raising the national debt ceiling. Without any obligation. And continue to borrow money, as before. Otherwise, they say, this will undermine the authority of the states as the most trusted borrower.
Republicans (Donald Trump in their camp) insist that the government first learn to live within its means. And finally reduce some of the costs. Because you can’t live on credit all the time, sooner or later you’ll have to pay.
Photo: Dmitry POLUKHIN
“THIS MAY CAUSE PANIC”
The debate is public. They are seen all over the world as a favorite series. So far no compromise in sight. And time is running. A couple more weeks – and the state agencies of America will not be able to fulfill part of their obligations. This was already the case in 2011, when several hundred thousand civil servants were sent on unscheduled vacations. The government simply did not have the money to pay their salaries: they had to borrow, and disputes over the national debt ceiling raged at the time. A couple of weeks later, the roof was installed, the money was borrowed, and the officials received their due.
But foreign investors around the world are not worried about the fate of US officials. They will definitely find something to do on warm summer days. If the Democrats and the Republicans disagree, then the United States will not be able to pay its creditors. And the country’s refusal to pay its debts, this is a default. And this already threatens a catastrophe for the entire financial world.
Here an explanation must be made. About a quarter of the US national debt is held by other countries. The top three include Japan, China and the UK, as well as the EU states. Also, some of the free money in US government bonds stays in large transnational banks. It is like a safe haven for them. When you don’t know what to invest billions in, the easiest way is to buy US bonds.
If the United States defaults on its foreign obligations, creditors will get very nervous. Someone decides to get rid of the toxic papers away from sin. And if there are too many such alarmists, it could reduce the solvency of states. And the possible depreciation of the dollar is the slightest of the side effects.
– It can cause panic. The same as it was during the global crisis of 2008. This is really something you want to avoid, warned James Dimon, chief executive of JPMorgan, one of the largest US banks, recently.
“In the event of a default, a crisis will break out with a sharp increase in interest rates and a fall in share prices,” said Mark Zandi, chief economist at Moody’s Analytics.
A jump in interest rates is an increase in the price of loans. An increase in the price of loans is a serious slowdown (or even a fall) in the economy. Snowball!
– If this lasts a week or two, the world will survive. Nothing bad will happen. But if they can’t pay the interest on their debts in a few months, then there will be a revaluation of the US national debt. Lenders will demand higher yields. And not only on US bonds, but also on other loans. This will lead to a slowdown in economic growth around the world, – says Mikhail Korolyuk, macroeconomist, head of the IFC Solid trust management department.
There will be something similar to the global crisis of 2008. Only on a larger scale. And in such cases, the goods always become cheaper. Including oil, gas, metals. And this is dangerous for the Russian economy: budget revenues and the ruble exchange rate may fall. But no expert can predict how events will unfold further. So far, there has been no precedent for the world’s largest economy to default.
Photo: Dmitry POLUKHIN
WAITING FOR A HAPPY ENDING
Most experts believe that the Democrats and Republicans will continue to see eye to eye. Find a compromise. It has been so many times. Difficult debates always ended with a happy ending. In addition, the United States also has a backup way to avoid default: to pay off debts to China, they just need to print dollars.
– I think there will be no default. It will be like a blockbuster. They will push you to the limit. Just a little more – and the world will collapse… But at the last moment, the sapper will defuse the bomb a second before the explosion, predicts Mikhail Korolyuk.
True, such a decision will only postpone the reckoning for another couple of years. An increase in public debt means an increase in the money supply. And this can further accelerate inflation. Price growth in the US last year reached 12% per year. All this will complicate the situation in the overseas economy. And even if a government bond default can be avoided, it won’t save us from other problems.
The first alarm bells have already rung. In the US this spring, three big banks were covered, while the rest have so far managed to be bailed out, traditionally awash with budget money. But in early May, the “golden” state – California, announced the default. Meaning, even the birthplace of Silicon Valley and Hollywood can’t make ends meet. It seems that the bubble is about to burst. But you will learn it in the next episode of our thriller…
A group of American programmers at some point decided to visualize the US national debt so that anyone can see what is happening to it in real time. Here is a link to this indicative resource: usdebtclock.org.
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