US Debt Ceiling - Its Impact on the World economy.

 In this article, we can understand the debt situation in The US and what are its implications. US Debt Ceiling and Its Impact on the World Economy.

1557, Spain became the first country to default on its debt. Since then Spain has defaulted almost 15 times. There are a number of countries across continents that have defaulted debts.

The US first defaulted in the year 1840, the reason being too much investment in infrastructure, especially building canals. Post WWII the US became an economically prominent country.

Experts say the US will not increase its debt ceiling and default on its debt which will be catastrophic for the whole world.

What’s happening -

The Gov t spends more money than it takes in. It’s done often. The US Federal Govt has added a debt ceiling of USD 31.46 Trillion. The maximum amount the treasury is allowed to borrow In order to meet its financial obligations. The secretary is using extraordinary measures to keep the govt running, moving cash around, and suspending investments in order to prevent a total shutdown. That’s only expected to last between July and September 2023. If nothing gets better by then, The US govt will be on default. This will cost the economy.

The default will be the worst situation for the US following situations in Greece and Srilanka. Although the default situation looks very close The US is far away from a situation like Greece and Srilanka.

Any govt spends a lot of money on Infrastructure, Military, Social programs and Salaries. Funding to meet these expenses come from taxes they collect.

Treasury Bonds

Whatever govt spends more than they collect they need to borrow from others. This will be done through the selling of Treasury bonds to individuals or institutional buyers both within and outside its borders. So who the money is owed? The answer is pretty much to everyone. Most of the money is owed to US citizens.

The US govt has had a deficit every year since 2001 and it is now accumulated at 30.93 trillion in 2022.

Why the debt ceiling needs to be moved higher?

The answer is it is not just the debt that needs to be considered but also the size of the economy. GDP is one of the main points to consider. However, how is the GDP of the US? Not great either. Every time The US has been in economic shock, the federal debt has gone up.

What makes this US debt situation look more dangerous? It is the same situation Greece and Srilanka had been in before the economic breakdown.

Does it mean the US is going towards the same?

The US has fundamentally a very different economic base than the other countries. As the largest economy in the world, The US enjoys more capital, the highest industrialization, and crucial imports like food and energy. Greece had no control over its currency and severe tax evasion. Srilanka was heavily impacted due to the pandemic holding back their tourism, and critical imports. The international dominance of the US Dollar has kept inflation below double digits. The US has a lot more flexibility in pushing the boundary than any other country in a similar situation.

The major banks have kept their interest rates near 0. This has helped the US keep their cost of debt much lower. Lower interest rates have been a boom to the US, as the cost of keeping the debt has significantly reduced.

Even though the debt situation looks worse investors don’t seem to believe that there would be any kind of crisis. Japan and China have been the two countries in the front to hold the US bonds. This might not seem the biggest issue but the US still needs to monitor its continuous excess liability habit.

The more US depends on selling its bonds and moving the federal deficit up it moves closer towards the debt trap until it takes measures to improvise the situation. With the recent war situation and still lingering around the pandemic situation, there is a lot to consider. It is not right to say the US has no issues but the way the US has engulfed itself in the world economy and that the world economy depends on it, the US needs to address the situation earliest.

Before the US claps on being the world’s biggest economy it needs to address the situation sooner.

You can further read about this Here

Debt Ceiling: Analysis of Actions Taken during the 2003 Debt Issuance Suspension Period Here

Conclusion

Experts still believe The US will raise its debt ceiling and will not default on its debt. Even if the Congress doesn’t support this the President of The US has many options at his disposal to raise the debt ceiling bypassing the Congress. Given the fact that The US is the biggest economy in the world and its implications on World Economy, the US will have to manage its situation in a short period and also look into options to avoid such situations in the future. In the long run, it will still be an economic problem. The more default the US commits, the more US Dollar loses its trust and a replacement currency will be the next discussion area. 

News : Biden and McCarthy have tentatively agreed to raise the Debt Ceiling Limit.