World is anxiously watching ongoing political bickerings in Washington as global economy teeters on brink of recession
President Joe Biden’s administration is once again facing a critical challenge as it tries to tackle the rising national debt. The looming US default is already roiling the market with uncertainty. It’s not good news for a world economy teetering on the brink of a global recession.
Let us look at what the impending crisis is and what President Joe Biden’s efforts to avert a crisis are. The crisis will have implications for the US and the world economy. Remember that the global economy is still reeling under the ongoing Russia-Ukraine war that broke out even before the world could recover from the crippling effects of the COVID-19 pandemic and the subsequent supply chain disruption.
The debt ceiling is a legal limit Congress has set on the amount of money the US government can borrow to finance its activities and obligations. It caps the total outstanding debt of the federal government. Once the government reaches the ceiling, it cannot issue new debt or borrow more, unless Congress raises or suspends the limit.
The debt ceiling is an aggregate figure that applies to gross debt. It includes debt in the hands of the public and intra-government accounts. About 0.5% of the debt is not covered by the ceiling.
he current debt ceiling crisis has arisen from a combination of factors. Years of deficit spending, coupled with economic downturns and the COVID-19 pandemic, have significantly increased the national debt. Moreover, political polarization in Congress has led to partisan battles over spending priorities, making it challenging to reach a consensus on raising the debt ceiling.
Severe consequences
A failure to raise the debt ceiling would have severe consequences for the United States and the global economy. Without the ability to borrow more money, the government would struggle to meet its financial obligations, including paying Social Security benefits, military salaries, and interest on existing debt. A US default on debt would undermine confidence in the US dollar, leading to higher borrowing costs, decreased investment, and potential economic instability worldwide.
Although there is an absolute ceiling set by the debt limiting regulation, hitting the ceiling will not totally stop all borrowings because expenditures on various counts are authorized by separate legislation. In effect, the ceiling only restrains the Treasury from paying for expenditures and other financial obligations after the limit has been reached, but which have already been approved (in the budget) and appropriated. Some economists hold the view that the debt ceiling does not provide the legal authority for the United States to default on its debt.
Moreover, a debt ceiling crisis can trigger market volatility and investor panic, as uncertainty surrounding the US government's ability to manage its finances could roil financial markets. This could result in a decline of the dollar, disruptions in international trade, and a potential recession with far-reaching implications.
The present debt ceiling was mainly established by the Public Debt Acts of 1939 and 1941 which have subsequently been amended to change the ceiling amount. The current limit is $34.46 trillion, which was hit in February 2023, according to Fed Reserve data.
Furious consultations
Amid furious consultations to avert a full-blown crisis, President Biden will be meeting Republican leaders on Tuesday. Ahead of the meeting Republics House Speaker Kevin McCarthy tempered expectations saying there had been little progress until that point.
Matters have come to such a head that only bipartisan cooperation of members of Democrat-controlled Senate and Republican-controlled House can bring about a solution. Treasury Secretary Janet Yellen has warned that debt ceiling brinkmanship can damage the nation’s economic recovery so close to a recession, according to an AP report. She has also sought the formation of a system that could prevent the country from frequently hitting the debt ceiling.
Unlike in the past, a collapse of the dollar now can benefit yuan renminbi that China has been trying to make an alternative to the dollar as an international currency. That would increase the pace of other nations switching to yuan for international trade.
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