Why Defaults Can Cause a Global “Financial Armageddon”.

From our correspondent in the United States,

Alexandre Hamilton is about to tear his wig. On Thursday, the United States reached its debt limit, forcing the Treasury to confirm its financial commitments until June 5. Beyond that lies major uncertainty, with a stalemate between Joe Biden and the Republican majority in the House. And the specter of historic defaults that could lead to global economic disaster.

What is a debt ceiling?

This is the maximum threshold that a US state can borrow. The United States is one of the rare countries to impose an upper limit, and had granted, back in 1917, full powers to Congress to raise it if necessary. The current cap, which was reached on Thursday, is 31.4 trillion (31.4 trillion) dollars. Consider a stack of 100 dollar bills connecting the Earth to the Moon. The total debt is $94,000 per American, or 121% of US annual GDP.

Bill Gale, economist at the Brookings Institution, recalls an important point, which illustrates the “stupidity of the current debate”: “When you raise the debt ceiling, it’s not so much a question of passing new spending as it is knowing whether Congress authorized the government to borrow to pay for spending that Congress has authorized.” The irony of the American system is that when elected officials choose a budget, with income and expenses, “they don’t automatically allow loans to make up the difference.”

Why is it stuck today?

For a long time, raising the debt ceiling was a nearly automatic process. However, since the 1990s it has become a political battle, especially when there was a congress which was divided into two parties as it is today. Republicans, who have never been so concerned about “mortgaging our grandchildren’s future by borrowing from China” as they have been away from the White House, refused to raise the ceiling without cuts to good dad’s family budget. Joe Biden and the Democrats are implementing the American doctrine summarized by left-wing economist Paul Krugman: we do not negotiate with “economic terrorists.”

Why doesn’t the United States default today?

“When we reach our debt limit, the Treasury Department uses accounting tricks to postpone final judgment day,” continues Bill Gale. This is the famous austerity “overwhelming step” announced by Secretary Janet Yellen. In particular, the suspension of the payment of some pension, medical or disability funds for public officials and former soldiers, as well as a “debt issuance suspension period” until June 5. After that the real risk begins.

Has the United States ever defaulted?

If the slogan “In God we trust” is written on banknotes, the American machine works more according to the motto “In debt we trust”. With the exception of a clerical error in 1979, the United States has never defaulted. This is why treasury bonds are considered a safe bet worldwide.

What will happen after June 5 without a deal?

Over the summer “The state will default on debt interest or other obligations, such as military pay, Social Security (pensions) or Medicare (health care for seniors)”, details Bill Gale. The Treasury will certainly try to set priorities, but there is a legal vacuum and could end up in court. According to analysts at Bank of America, the default “is likely in late summer or fall”, and could last “from a few days to a few weeks”.

Are defects really possible?

In 2011, under the administration of Barack Obama, the market crashed due to the threat of default. For the first time in history, S&P has downgraded America’s debt rating. An agreement was reached at the last second to raise the ceiling. Like nuclear deterrence, neither side wants to be held accountable for an economic disaster. But the Freedom-elected Republican caucus, which has put Kevin McCarthy through hell for his election as Speaker, can refuse to give up this time. Some have proposed the possibility for the Treasury to mint a platinum coin and give it a value of 1,000 billion dollars. But Janet Yellen rejected this magic trick, which was disputed in lawyer circles.

What are the consequences of default?

Mark Zandi, chief economist at Moody’s Analytics predicts “Financial Armageddon”. Concerns Bill Gale barely responds to: “The consequences of a major deliberate failure remain unknown, but predictions range from “serious to catastrophic.” With a loss of confidence in the dollar and Treasury bills, rising interest rates for households, and a downturn on Wall Street – and therefore in personal retirement savings plans. “With the consequences of the financial planet, this will spread to the global economy, just like the 2008 crisis. With the economy already on the brink of recession, it would be crazy to risk a new global financial panic”, the economist warned. “The elect are playing with fire. »

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