US Debt Crisis: Will a Default Shock the Global Economy?

The Russians learned the word “default” in August 1998. For most, it is associated with a sharp jump in prices, although the process itself, of course, is much more complicated. In early May, the default was actively discussed in America.

US Treasury Secretary Janet Yellen has warned that a default is possible as early as June 1. The reason is that the US national debt has broken through the ceiling of $31.4 trillion set by the authorities and has already reached $31.8 trillion. Of course, technically it is not difficult to prevent a default – for this, the American authorities can raise the ceiling of the national debt for the hundredth (without exaggeration) times. The problem is that the country’s annual budget is $6.9 trillion. That is, the chances of reducing the debt are very illusory. Accordingly, the notorious soap bubble can burst at any moment. Let’s see if this will affect us.

What is public debt

The budget of any state includes planned revenues (from tax and other receipts) and planned expenses. If expenditures are initially higher than revenues, then the budget is accepted with a deficit. There are two classical ways to close the deficit. The first is borrowing at interest – from commercial, and sometimes from government agencies and citizens. And the second, you guessed it, is to live within your means.

What’s going on in the USA

The United States has never concealed the fact that for a very long time they have been living beyond their means. Here is just a small example – in March 2023, US budget revenues amounted to $313.24 billion, while expenditures were $691.317 billion. Thus, in just one month, the deficit amounted to 378 billion dollars. The American economy is so large that only the monthly budget deficit there is comparable to the entire annual budget of Russia.

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From whom the United States is borrowed

Naturally, the US budget is constantly borrowing money. You may be surprised, but the biggest lenders are the US government itself and the Federal Reserve, which account for almost 40% of the US national debt.

The Federal Reserve System, which issues dollars into circulation, is not a complete analogue of the Central Banks of other countries. In most countries of the world, the central banks are state-owned, while the Fed includes commercial banks.

The share of foreign holders of US government debt accounts for about a quarter of the amount of debt. The remaining holders are US mutual funds, financial institutions, pension funds, insurance companies, and US citizens.

Why the US government tax is huge

So, as we wrote above, with the country’s annual budget in fiscal year 2023 of $6.9 trillion, the US public debt has already reached $31.8 trillion.

Thousands of banks and corporations around the world have been happy to give and lend to the US government – by investing in US bonds. The main reason is that the States always pay on time. After all, the debt is not static – some bonds were paid off, others were issued, and so on.

It seems that everyone was comfortable with US bonds as a safe haven, turning a blind eye to the huge bubble that has inflated in the economy. Suffice it to say that in 2000 the US national debt was a relatively acceptable 5.5 trillion dollars and in 22 years it has grown almost 6 times.

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What is a default

Default is the inability of the state to pay off its obligations – that is, to pay interest on loans. The US has been paying interest on previous loans for more than twenty years thanks to new borrowing. New borrowing increases the national debt.

The implication of a US default would be that with the $31.4 trillion government debt ceiling already exceeded, the government would not be able to borrow more. This means that they would have nothing to pay for the previous ones in time.

From a technical point of view, this issue is easily solved. On May 31, the US Congress will consider an agreement to suspend the debt ceiling until January 1, 2025. If the agreement is approved, the United States authorities can continue to borrow in good conscience. But the soap bubble will not just go nowhere, but will continue to grow.

What happens if default does happen?

Here, all economists agree on only one thing – something unprecedented awaits the global financial system. The general outline of economic shocks looks like this.

The White House Council of Economic Advisers has published estimates that a short-term default (i.e., suspension of debt payments) will lead to a 0.6 percent drawdown in US GDP and the elimination of half a million jobs in the country. A prolonged default will reduce GDP by 6.1 percent, lead to the loss of 8.3 million jobs and the collapse of stock markets by 45 percent.

This is about what is expected in America itself. And what about in other countries of the world? The largest holders of US government bonds – Japan, China, Great Britain – are likely to start selling bonds in large volumes. Accordingly, US bonds will fall sharply in price. And in any case, it turns out that their owners did not earn, but lost their money. More precisely, it will become obvious that America simply ate this money.

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Following this, with a high degree of probability, a recession will begin in the global economy. Which, of course, will also hit Russia with a drop in energy prices due to a reduction in production and consumption in other countries.

And what about the main world reserve currency – the dollar? Since enterprises and technologies, as well as resources, will not go anywhere, sooner or later the world will get out of the economic hole. Probably due to the fact that many states will tend to pay more often with their own currency. The dollar is at risk of losing the status of the main reserve currency and, accordingly, significantly cheaper.

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2023-05-29 13:33:00

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