This question came in the wake of expected scenarios for dealing with the US debt file, which have been put forward by US political analyst, Deacon Hyatt, including that US President Joe Biden decides to defy Congress and orders the Department of Treasury to ignore the debt limit. , and to bring a potentially high-risk case to the Supreme Court.
Although the world has become accustomed more than once to the controversy that takes place between the White House and Congress over the US debt file, the intensity of the differences intensifies this year between them concerning the debt ceiling. maximum debt, as the Biden administration seeks to increase as the Republicans who have the majority in the House of Representatives seek to increase it.Representatives have tied the approval of its increase to cuts in public spending, which prompted Treasury Secretary Janet Yellen to warn that the United States is at risk of defaulting on debt payments by next June, as Biden responded to that warning by inviting the four top congressional leaders to an urgent meeting that will be held next week.
What does the US debt ceiling mean?
Economist Dr. Abdullah Al-Shennawy explains that the US debt ceiling is the total amount of money the US government is allowed to borrow to meet its current obligations, such as social security payments, repayments taxes, public debt interest and national defence, and indicates that controversy arises over the difference between public debt and annual budget deficit or deficit, as annual expenditures may exceed annual revenues, which leads to a budget deficit, and here the government endeavors to issue debt – treasury bills, securities and bonds – with the aim of raising funds to be able to carry out its work and its obligations, noting that before 1917 it did not There was no The so-called debt ceiling.
Why is the US debt ceiling so problematic today?
The United States Secretary of the Treasury announced that the American debt had reached the legal limit, since on January 19 it reached the debt ceiling set by Congress at 31.4 trillion dollars, or 130% of GDP, and 11% of the volume of the world debt of 303,000 billion dollars. use exceptional cash management and debt management measures to avoid defaults, according to Dr. El-Shennawy.
Al-Shennawy, the economist, adds: “But the Treasury measures will be temporary and characterized by uncertainty, and therefore Congress must either suspend the debt ceiling or raise it between July and September 2023 so that the government American can borrow the money that meets his needs, and I think he should vote for the debt ceiling because not raising the debt ceiling could have catastrophic effects on the American economy and the various programs of the federal government.
The impact of breaching the debt ceiling on the economy and the lives of Americans
In an interview with Sky News Arabia, Dr Al-Shennawy explains the repercussions of the US government’s breach of the debt ceiling on the US economy and the lives of Americans, as well as on the financial system, according to this following :
Reaching the debt ceiling would hamper the government’s ability to finance its operations, including the provision of national defense or the financing of benefits such as health insurance or social security. Possible impacts of the cap include downgrades by credit rating agencies. Increased borrowing costs for businesses and homeowners. Weak consumer confidence that could shock the US financial market and push the economy into recession. About a tenth of US economic activity has come to a halt, according to estimates by economists at Goldman Sachs. Higher interest rates that could divert future taxpayers’ money from growth-enhancing investments such as investment in infrastructure, education and health care, and raise interest rates enough to increase the $850 billion debt. Destabilizing financial stability and shaking the throne of treasury bond solvency has long boosted demand for the dollar, contributing to its value and status as the world’s reserve currency. whether due to a default or the uncertainty surrounding this process, would cause investors to sell US Treasury bonds and thus weaken the US dollar. The expected decline in the value of the dollar is making debt denominated in other currencies relatively more expensive, threatening to push some emerging economies into debt crises. Many US exporters could benefit from a weaker dollar, as it would increase foreign demand for their products by making them cheaper. However, the same companies will also face higher borrowing costs due to higher interest rates. The instability of the dollar could also benefit ambitious big power rivals such as China, although Beijing has long sought to position its currency as a global reserve, but the currency accounts for less than 3% of the world’s allocated foreign exchange reserves. A breach of the debt ceiling leading to insolvency could lead to the loss of 3 million jobs.
And in the event that the debt ceiling is raised, Dr. Al-Shennawy says the US economy will be able to continue to borrow the funds needed to run the government and meet fiscal obligations incurred by previous administrations.
Threatening the position of the dollar and strengthening the prospects of recession
For his part, Hashim Akl, economist and board member of the Middle East Center for Economic Studies, said in his interview with “Economy Sky News Arabia” that the most significant repercussions of not raising the debt ceiling are reflected in threatening the position of the dollar on a global scale, increasing the possibilities of economic recession and destabilizing financial markets.
Akl explains that the exacerbation of the debt crisis could shake confidence in American economic policies, and thus undermine the strength of the dollar and its position in the world financial system, which supports the plans of internationalization of the yuan led by the China.
He also pointed out that “US Treasuries will lose their edge as a risk-free asset, which will relatively weaken investors’ appetite for them. At the same time, this crisis threatens the stability of global financial markets, as well that increasing the chances of an economic recession, according to ratings agency Moody’s estimates.” The credit card indicated that US gross domestic product could contract by around 4% in the event of a deficit financing default.
spur fiscal reform
In his statement to Sky News Arabia Economy, economist Hussein Al-Qamzi ruled out non-payment of US debts, adding that “the text of the constitution prevents the federal government from defaulting on payment debt, but that can’t happen under any circumstances, and there’s an argument that if he decides Congress is in default, the president has the power and the obligation to pay it without the authorization from Congress even if it means borrowing more money to do so, this option represents a real constitutional challenge to the debt limit in theory at least, according to the Fourteenth Amendment to the Constitution, the government should continue to issue new debt To pay bondholders, Social Security beneficiaries, government employees and others, even if Congress fails to lift the limit.
Al-Qamzi adds: “On the other hand, legal experts consider the debt ceiling limit to be a necessary element for Congress’s authority over the borrowing process, and it is an important incentive for reform. the budget in order to reduce the debt. Both parties agree on the question of the need to raise the ceiling on the debt, but the problem is that the Republicans want to tie their approval to the reduction of expenditure in the budget “.
Get out of the woods
As for how to get out of the debt ceiling crisis, economist Dr Al-Shennawi points to several steps that can be taken, including getting President Biden and the House of Representatives to reach an agreement on the ceiling, or whether the White House seeks a one-size-fits-all solution to the crisis, or Congress passes temporary legislation Suspend the debt ceiling to delay default and suspend the debt ceiling until the end of September to that the new deadline for the debt ceiling be aligned with another budgetary deadline.
If Congressional debt ceiling negotiations aren’t resolved before the ceiling is hit, the Treasury could avoid a default for several months through a series of temporary measures it calls “extraordinary measures.” , including suspending payments to some government employee savings programs, underinvesting in some public funds and delaying securities auctions, according to Al-Shennawi.
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