The world’s attention has been focusing on the US Capital (Congress) on the debt ceiling because if the borrowing debt is not increased by Monday, June 5 there will be international implications including for small economies like Guyana and other Caricom states.
The world’s economy is tied to the US. Every country, every banking system, every international financial institution will be affected. The US debt ceiling must be increased. Only Congress can increase the debt ceiling. The White House or President (Democrat) and the Speaker (Republican) of the House (majority Republicans) reached an agreement over the weekend to increase the debt ceiling by US$2 Trillions beyond the current US$38.3T debt. However, the Speaker faces rebellion from among dozens of members of his party opposed to any deal without cuts in hundreds of billions annually over the next few years. The Senate, narrowly controlled by Democrats, will approve whatever debt limit bill the House sends to it. The Speaker is likely to get most Democrats to support the agreement he made with President Biden.
The debt ceiling must be extended by June 5 when the US government runs out of money to pay bills. If the debt ceiling is not increased by that date, it is unclear what happens as it is unchartered waters (never happened before). But for sure, it will shake up the global financial institution. It will also erase hundreds of billions if not trillions in stock value. Just last week, tens of billions of dollars were wiped out from the value of stocks when the White House and Republican leaders were having difficulties in reaching a deal. The Republicans want major cuts in expenditures of almost one trillion dollars in exchange for increasing the debt limit. Biden is opposed.
What is the debt ceiling? It is a law that puts a cap on total amount of federal debt allowed to be outstanding. Congress must periodically raise the country’s debt limit, or the government won’t have enough money to pay its obligations. The law does not allow the President to spend more money. Rather it allows the President to borrow enough to pay the bills Congress has already approved. The government does not take in enough money from taxes to pay bills. So it borrows money to meet shortfalls including the interest to be paid on the borrowed money. President Biden borrowed and spent heavily during and after Covid. So the money ran out.
The US economy is very strong. So it can afford to borrow money and it has no shortage of lenders. Investors gladly lend the US government money. Presently available funds could keep the government running till June 5. The government must borrow to keep government functioning smoothly thereafter or it will have to start laying off workers and trim expenses that will negatively affect the US as well as global economy – millions will lose jobs, trade will decline as would growth, and stock market will plunge.
The consequences of the US being unable to borrow money will be cataclysmic — an economic recession in the US as well as in other economies closely tied to it with worldwide reverberation. The world looks to US economic leadership. Having the strongest economy, and globe takes a cue from Washington on finance. U.S debt historically has been as safe and investors as well as central banks never fear that US will not meet financial obligations. They trust the US economy. Without the US spending money, there could be a financial meltdown. Trading will come to a halt. Default on payment on US borrowing is bound to shatter confidence in USA to meet obligations. No institution or country will want to lend the US money. And the US will have problems for takers to fund its US$16T treasury debt.
Trade will also be affected. Almost all global trade is carried out with the American dollar. Central banks store US dollars. Over half of the world’s foreign reserves are in dollars. If the US cannot borrow and spend and dollars are not available to conduct trade, then the global economy will be in a tailspin. Trade will collapse as without dollars, there can’t be any transaction. There will be an erosion in trust in using the US dollar as a currency for global trade. Other currencies – such as the Euro and even the Chinese Yuan (Renminbi) – will gain greater legitimacy as a medium to pay for trade. This could lead to ‘de-dollarisation’ of the world’s economy, strengthening the Euro and Yuan as currencies for trade.
It is in the US (Congress) interest to increase the debt ceiling ASAP.