According to the law of 1917, each time to raise the ceiling of the national debt, it requires a decision of Congress. US debt has reached $31.4 trillion (about 125% of annual GDP). After World War II, the ceiling was raised more than 40 times. Only under Trump – twice. This often turned into a political spectacle, but each time at the last moment “a miracle happened”. America has yet to declare a default in its history. But now the Republicans (they have a majority in the House of Representatives) are doggedly demanding budget reforms, spending cuts of $16 trillion over 10 years and the elimination of the budget deficit. The White House does not want to cut spending.
About a quarter of the state debt is, in fact, the “debts” of some ministries within the administration to others (about a quarter of the volume, an analogue of the clearing system, it does not increase not the burden on the budget), about 20% is the “paper” debt of the Fed, formed as a result of the issuance. That is, 45% of the debt can only be claimed in theory. American private and commercial investors lent the government 6 trillion (about half), foreigners – about 7.4 trillion (Japan is in first place – about 1 trillion, China 840 billion, the UK 645 billion , etc.). The share of the “foreign component” remained almost unchanged after the 2008 crisis. The average duration of debt securities (short-term and long-term) is around 75 months. The cost of maintenance last year was just under 400 billion, or 6.8% of budget expenditure. For comparison, Britain has 14%, France and Germany have 2% each, China has just under 3% and the global average is around 5%. “Games” with the throwing of short and long treasures provide room for maneuver. The amount of the service is lower in proportion to the budgetary expenditures than in 2008-2009. However, in recent months, the cost of service (due to the growth in the volume of short-term liabilities) has started to grow exponentially, reaching $923 billion in the first quarter of 2023 (a 54% increase compared to in 1Q 2022). Although on an annualized basis, it is still less in the budget spending share than it was during the Reagan years. Including due to the fact that the Biden administration managed to significantly increase budget revenues.
The White House does not want default. It’s June 1 that he most likely won’t come, even if nothing is done. For several months, the Ministry of Finance will still be able to somehow “twist”. There are few options left other than raising the ceiling by Congress. It is possible to temporarily lift the cap, however, the decision of Congress will still be required. Either abolish it by law in principle, or establish it as a percentage of GDP (say, Japan’s debt has already exceeded 250% and nothing, there are many countries where it is over 100%). The US Treasury (this is already an exotic option) can issue, for example, a “collector’s coin”, allocating any of its denominations, even a trillion dollars, depositing it with the Fed and receiving the trillion required for it. Finally, Biden himself, guided by the 14th Amendment to the Constitution, which gives him this right, can by decree raise the national debt ceiling. This will provoke lawsuits (there has never been a precedent in history) on the Republican side for abuse of power, but it will buy time.
In itself, such a situation, as with the “collector’s coin”, will however cause enormous panic in the world markets due to the large volume of American debt securities circulating there and in the context of the fragile credit rating of the ‘America. The Ministry of Finance can also quietly borrow money from large companies (they have about the same trillion in deposits) or pledge federal property, for example federal land (a little less than 30% of the land fund of the country). These and other manipulations, in principle, will allow us to collect 2-4 trillion dollars and stretch it to 2024, until the elections.
But what if the US government doesn’t want to “turn around” and still declares a default? First of all, the country’s banking system will collapse, starting with the regional banks, among which there are two hundred already problematic banks – the banks keep a lot of debt securities on their balance sheets. Social payments will continue, although a number of public spending items will be suspended. The so-called shutdown (“closing of the government”) in the event of exceeding the public debt ceiling will only affect the costs of public administration, which represent about 25% of all budgetary expenditure. Neither social payments nor the ability to issue and refinance debt will be limited. The Fed will start powerfully printing money, which will cause inflation to rise sharply – to double-digit percentages. A sharp economic downturn will begin in the US – down to minus 10%, unemployment will rise to 10-15% from the current record high of around 3%. The value of the dollar will fall, but the other currencies – the yuan, the yen and the euro – will rise. For “export-oriented” China, it will be, if not a disaster, at least a big problem with the inevitable sharp drop in GDP. Only Europe can be a relative winner. In a context of both the strengthening of the euro as the “world reserve currency” and a sharp, even crushing, fall in the prices of all commodities. Against the backdrop of the global crisis, oil is likely to rise to 30-20 dollars a barrel, and this for several years.
This is an extremely negative scenario for Russia and many other countries, both for oil producers and for commodity exporters in general, and for those with large debts – Latin American countries or the same UK. As well as for those who have a large amount of US debt or dollars held in gold reserves. So, US default will indeed drag down many countries, hitting them even harder than America itself.
However, given the extent of the possible financial turmoil, it is unlikely that the United States will accept a default, a solution will most likely be found. Although the nerfs to the performance of Democrats and Republicans will continue for some time to come. As they say, nothing personal, pure politics.
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