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U.S. Debt Default May Tank The Global Economy

If you haven’t kept track of the discussions related to the debt limit, I don’t blame you.

It’s not the most exhilarating story to follow, but this government gridlock is no longer just a silly disagreement on Capitol Hill.

It’s time to pay attention as the US is rapidly approaching the deadline for defaulting on its debts.

In fact, the US could default as early as next week.

Treasury Secretary Janet Yellen stressed yesterday that the US would likely not be able to pay its bills from June 1 if the debt ceiling, currently at $31.4 trillion, is not raised by then.

The Outcome?

No one can precisely determine the results of such a situation, due to the fact that it has never occurred before.

However, economic specialists are confident it will be highly detrimental, and the impacts can vary from "assured recession" to "international financial market collapse."

According to the NYT, the reach of the destruction depends on how long the default would last.

The effects of an initial debt default of the federal government would likely spread rapidly across the globe.

Demand for Chinese electronic products shipped to the USA could disappear.

Swiss financiers who have invested in US Treasurys would experience losses.

Sri Lankan businesses may no longer be able to use US dollars in place of their own unstable currency.

Mark Zandi, the chief economist at Moody's Analytics, declared that "No corner of the global economy will be spared" if the U.S. government defaulted and the crisis was not resolved swiftly.

According to Zandi, if the debt ceiling is exceeded for only a short time, the US economy would suffer such a dramatic decline that it would result in the loss of approximately 1.5 million jobs.

If a government default were to persist for an extended time, the results would be much worse according to the findings of Zandi and his team in their report.

The U.S. economy would suffer, 7.8 million jobs would be lost, borrowing rates would rise, the jobless rate would shoot up from the present 3.4 percent to 8 percent, and the stock market would suffer a huge hit of $10 trillion in household wealth.

What is the status of the negotiations?

Well, not too hot.

It appeared last week that there was a potential for a breakthrough, but the White House and GOP still have not agreed to raise the limit.

House Speaker Kevin McCarthy and President Biden met again today, but there does not appear to be any new progress although the meeting was “productive” in McCarthy’s words.

Keep in mind, the U.S. could avoid defaulting by raising the debt ceiling to an egregiously high number or getting rid of the ceiling altogether (which we probably should do).

Only one other country in the world has a debt ceiling… and it’s Denmark which has a smaller population than Maryland and lower GDP than North Carolina.

So, maybe it doesn’t make sense for the wealthiest, most powerful nation in human history to have a debt limit… just maybe.

Why The Lengthy Disagreement?

Blue and red don’t mix well, especially when it comes to government expenditures on certain things like social security and Medicaid.

Republicans have suggested that an increase in the debt ceiling should be accompanied by a reduction in nondefense federal expenditures, including cuts to social services.

Democrats have alleged that the Republicans are attempting to leverage the nation's financial status to push through their cost-cutting program.

Both parties are generally content with using taxpayer funds to start forever wars, bail out banks, subsidize Big Oil, and give huge tax subsidies to Big Pharma.

But, when it's time to pay for veterans’ benefits that help protect our freedoms, allocate funds for social security to help our nation’s most vulnerable, or provide Medicaid to people affected by fossil fuel externalities, most of Congress is cockeyed.

Biden stated yesterday that the GOP's plan could put "food assistance at risk for nearly 1 million Americans," and he characterized it as "extreme" and "unacceptable."

How Often Does The Debt Limit Increase?

Since 1960, the US Treasury Department reports that there have been 78 separate occasions in which Congress voted to either extend, revise, or raise the debt limit.

Of those 78 times, 49 were when Republican presidents were in office, while the remaining 29 were when Democrats held the presidency.

None of these times involved a full U.S. debt default, but this isn’t exactly new territory…yet.

In our country’s 247-year history, the government has partially defaulted several times.

Alex Pollock, a former Treasury Department official, has argued that there are four past instances that represent U.S. defaults.

  1. During the Civil War in 1862, paper money was printed due to the lack of gold and silver coin reserves.

  2. In 1933, the government refused to follow through with its promise to bondholders to repay them with gold.

  3. In 1968, silver certificates were not honored with silver dollar exchanges

  4. In 1971, the Bretton Woods Agreement was abandoned which contained a promise for gold redemption of foreign government-held dollars.

The Bottom Line

Despite the existence of prior defaults, Politifact asserts that the current situation is not analogous.

In accordance with a study conducted by Moody's Analytics, a debt-limit breach could have dire consequences, such as a decrease in real GDP, the loss of almost two million jobs, and a jump in the unemployment rate.

U.S. debt obligations have never been this high in such an inflated market, so defaulting could mark the beginning of doomsday for millions of Americans and billions around the globe.

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