The US risks defaulting on its debt in June, instead of the previous expectations of reaching the ceiling next autumn.
For the 8th time in ten years, the United States faces a sovereign debt crisis that risks bringing the world’s largest economy into default. This time for real, according to US Secretary of the Treasury Janet Yellen.
Previously it was hoped the US debt ceiling would not be reached before next autumn, but Yellen warned the crisis is actually much more impending. The Secretary of the Treasury said the limit will actually be reached around the beginning of June.
American Credit Default Swap (CDS) and US long term bonds will mature in June, and the US will either have to repay them or increase the debt ceiling.
The problem, as it was the case with previous sovereign debt crises, is that the US debt is actually larger than the nation’s economy. This means, practically, that the United States doesn’t have the means to repay it all at once.
According to the latest estimates, the US sovereign debt amounts to $31 trillion, 20% bigger than America’s GDP.
If the debt ceiling is not raised before June, the US will be forced to default on its debt, wreaking havoc on the world’s economy. It would be a crisis of unprecedented proportions, with an expected 10% drop in GDP and possibly the loss of American hegemony over the global economy.
But why wouldn’t the US raise its debt ceiling then?
A ticking time bomb
To raise the US debt ceiling it needs the approval of both Chambers of Congress. The current administration run by President Joe Biden is Democratic, whose party firmly controls the Senate.
The other chamber, the House of Representatives, however switched to Republican control during the last Midterm Elections.
Historically, as the US approaches its debt ceiling risking default, the opposition party tries to win concessions to increase the ceiling.
This time, however, the Republicans did not simply threaten to refuse raising the debt ceiling. They demanded a final solution to the debt problem, avoiding constant and dangerous raises like it has happened for the last ten years.
Indeed, the US debt is often defined as America’s “time bomb”. A constant increase devalues the US dollar and therefore the economy, which in turn needs more debt to sustain new projects and so on… A vicious circle that, if left uncontrolled, could indeed destroy the American economy.
Therefore Republican House Speaker Kevin McCarthy proposed a bill that would prevent public spending if it incurs in additional debt. The Republican party threatened that only the approval of this bill would lead them voting for raising the debt ceiling.
But the bill was proposed with the expectation of a debt crisis coming next autumn, not right now. At the moment, Congress would either have to hastily pass the Republican bill or the opposition party needs to give in and vote to raise the ceiling.
Otherwise the US will default on its debt. Which would be the economical equivalent of Russia using the nuclear bomb on Ukraine.
