Treasury Secretary Janet Yellen stated that the United States will not be able to pay its bills on June 1 if the debt ceiling is not raised. It could be devastating to the US economy and the global economy if a solution is not put in place quickly.
The first problems
Since the United States has always raised the debt ceiling in the past, it’s not entirely clear where the money will run out first. Tax money is still pouring in, and it’s not clear which bill will be the first the state can’t afford to pay. Everything from salaries to employees in the military, pension payments, payments to suppliers of services and goods, and debt repayments.
Plague or cholera? Treasury Secretary Janet Yellen must manage what will be paid and what will remain unpaid if the money is not enough. Photo: Shuji Kajiyama/AP
The first people who won’t get paid for the work they do are those who work for the federal government, according to Yellen.
Thus, up to eight million people may lose their jobs. The Biden administration estimates that up to half a million jobs could be lost in the first week alone, while analysis agency Moody’s tells the Associated Press news agency that up to 1.5 million could lose their jobs in one week.
Yellen says it will destroy businesses, and then the economy will plunge into recession. Newspaper The Economistt describes the situation we can expect as follows:
“The stock market will crash, unemployment will skyrocket, and panic will spread throughout the global economy.”
The Economist says Yellen will play a crucial role in dealing with such a crisis, and that the plan is to abstain from debt payments. More on the global crisis that may arise further in this thread, but first:
Why is this happening now?
Always raise the ceiling before
In the past, the US Congress has often increased the maximum amount of money that the United States can borrow to pay bills it has already committed itself to. So creditors and the financial market assumed until last week that it would happen again, but something has changed.
The US must raise the debt ceiling from the current ceiling of $31.4 trillion if it is to be able to pay its bills. (Trillion in English).
Recently, the Republicans agreed to raise the debt ceiling, but in return they demand that the United States cut spending. The demands were for higher requirements for those receiving social benefits, food stamps, and healthcare from the state program.
This time, the condition is that the budget will not be increased next year, and limited to more than one percent of the annual growth for the next ten years. On Biden’s part, that means he could have major problems implementing student loan cancellations and tax cuts for electric cars. The White House stated that if the deal were proposed, it would make the middle class and working families bear the brunt of the tax cuts on the rich.
The problem now is that the political danger is great for both sides, and no one wants to give up. And in practice, it may already be too late.
Travel: June 1 is just six business days away. There may already be a little time. Photo: J. Scott Applewhite/AP/NTB
It must be done now
There are only a few working days left before June 1, and much more needs to be done.
First of all, Biden and the Republicans must come to an agreement. They must then draft the wording of the agreement, and then it must be approved in Parliament. According to The Economist, this could present practical and logistical problems, as many representatives have already returned to their home states for the summer, and it takes time for Parliament to be able to make decisions in place. The same agreement must then be implemented through the Senate, and then it can be implemented.
Yellen warns that it is already too late for bills due on June 1.
But if an agreement is reached, many will calm down.
Confidence in that was high, but Wednesday’s stock market plunge is being interpreted as unease at not having a solution in place.
Is the United States solvent?
Last night, the credit rating company Fitch released a little news bomb: They’ve put the US credit rating on watch. It may not sound very dramatic, but if there is no confidence that the United States will service its debt, it will be more expensive for the United States to borrow money.
The AAA rating that the US now enjoys at least means that as long as the debt ceiling is raised, they can borrow more money and thus increase debt on June 1st. At least if they can adopt it.
But if the US loses its AAA rating and worse – defaults – it will cause US Treasury bonds to be considered an unsafe investment and their value to decline.
US government debt is an important part of the global economy and bond market. It is considered a safe investment because the US State Bank guarantees its value. Banks, for example, have invested money they consider safe in US government bonds. It is difficult to predict the full impact of the devaluation of US government bonds, but it is difficult to ignore the fact that it will have a huge negative impact on the entire financial industry.
If the debt is not repaid, it will really hurt the financial market. US debt accounts for a third of the global total. The Economist describes US payments as “the lifeblood of the financial market” — the giant, regular bond market payments are money someone is waiting to be paid at the other end. It is the basis for continuous daily flows, and is considered an assurance that the global financial market will have to deal with new uncertainty.
In the next case, according to the newspaper, this will lead to companies and individuals in the United States obtaining more expensive loans, which will have more multiplier effects.
However, the dollar is rising today
Both President Joe Biden and Treasury Secretary Janet Yellen have called the results catastrophic, if they are not allowed to run up debt and pay the bills.
It would cause widespread suffering as Americans lose the income they need to survive.
However, the global economy is so dependent on the wheel of the American economy that it is almost impossible to imagine what would happen if they stopped doing it.
In the morning hours of Thursday, the Asian stock market was rocked by turmoil surrounding the debt ceiling.
However, the price of the dollar is rising. It is higher than both the euro and the yen on Thursday. The dollar has also benefited from investors looking for a safe investment, which is paradoxical since the biggest moment of turmoil right now is precisely the US economy.
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