US Debt Ceiling And How Would A Default Impact The Global Economy?


Even though a potential US Debt Ceiling default could occur within a few days, the White House and Republicans have made no progress in their discussions.

If a deal isn’t reached in time, it could be disastrous for the whole world financial system.

President Joe Biden said that he and House Speaker Kevin McCarthy are still not on the same page about the budget, which has stopped talks.

The back-and-forth is already hurting the economy. Fitch, a credit service, has put the United States’ AAA credit rating on “negative credit watch.”

“Many Americans would lose cash during a default.” “A lot of people can’t make it on their own without that money.” Secretary of the Treasury Janet Yellen said that the rapid drop in income could cause a recession. which would cause a lot of companies and jobs to close in the United States. Yellen said this would happen because a large number of jobs would be lost.

What is the limit on the debt?

The debt cap, which is also called the debt limit, is the maximum amount of debt that the Treasury Department can take on to pay its bills.

These responsibilities include payments for Social Security, interest on the national debt, tax refunds, salaries for the military, and more.

In January, the US reached its ceiling on debt, which is now $31 trillion. At the time, the Treasury said it would take unusual steps to meet the government’s responsibilities.

When the debt ceiling is raised, it doesn’t give the US permission to spend more money. Instead, it lets the country pay for programmes that were already approved by past administrations and Congresses.

When is ‘X Date’?

The X Date is the day when the US will not be able to pay its bills.

Ms. Yellen has set the White House and Congress a “hard deadline” of June 1 to raise the ceiling. She had said before that it was “impossible to predict with certainty” when that would happen.

Now, the Secretary of the Treasury has stated that “it’s highly unlikely that we’ll be able to pay all of our bills by June 15.”

What will happen if the US stops paying its bills?

The US government would not be able to pay Social Security recipients or people in the service. If interest rates went up, mortgages, car loans, and credit card fees would all go up.

It would almost certainly push the US into a slump with high unemployment. Even in the short term, different analyses from Goldman Sachs and Moody’s show that a default would stop one-tenth of US economic activity and cost two million jobs.

Economists at the White House said that a failure would cost 8 million jobs and cause the stock market to fall by 45 percent.

In a separate Moody’s study, it was found that the stalled negotiations will hurt emerging economies. Commodity exporters in the Middle East, Africa, and Latin America will be hurt the most because it will be harder to get credit.

The US dollar would also lose strength if the government didn’t pay its bills. 60% of the world’s foreign reserves are in US dollars, but buyers could lose faith in Treasury securities.

In this case, if the US dollar got weaker, it would make it possible for another currency to take over as the world’s reserve.

If the country’s currency got weaker, it would make it more expensive for low-income countries with a lot of debt to pay their bills.

If there was a recession, consumers would try to limit the amount of things they buy, which would hurt economies that depend on exports.

A recession could also happen to countries that aren’t very strong.

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