US Debt Default Could Trigger Global Economic Meltdown

By Yasir Masood | Gwadar Pro May 23, 2023

Editor's Note: The author is a Beijing-based political analyst. The article reflects the author's opinions and not necessarily the views of Gwadar Pro.

The debt ceiling is a legal cap on the total amount of money the United States government can borrow to fund its operations and pay its financial obligations. It is determined by Congress and requires periodic adjustments to account for the government's growing debt.

America's mounting debt is the outcome of simple math – each year, there is a mismatch between spending and revenues. When the federal government spends more than it collects, it must borrow money to make up the difference. And each year's deficit adds to the country's expanding national debt. According to the Congressional Budget Office (CBO), the last year’s revenue collected was $4.9 trillion whereas the total spending accounted for $6.27 trillion and currently CBO’s updated projections show a federal budget deficit of $1.5 trillion for 2023. That estimate is subject to considerable uncertainty, though, in part because of a recent shortfall in tax revenues.

The worst deficits in American history were precipitated by increased expenditure in the midst of national emergencies, such as wars and the Great Depression. US military spent $877 billion in FY 2022, 40% of the world's total and more than the following 10 countries combined. At least a quarter of that could be avoided by ending America's “conflicts of choice”, closing many of its roughly 800 military bases abroad, and negotiating new arms control agreements with China and Russia. The Taliban of Afghanistan, Saddam Hussein of Iraq, Bashar al-Assad of Syria, Moammar Qaddafi of Libya and Vladimir Putin of Russia have all been on the list of despots since the year 2000. It is constantly told to the American public that war is necessary for America to survive.

US deficits are now also caused by predictable structural factors: it’s ageing baby-boom generation, rising healthcare expenditures, and a tax system that doesn't generate enough money to pay for government promises. In addition to having a severe effect on the economy, the coronavirus epidemic has necessitated a legislative response that has further accelerated a trajectory that was already unsustainable.

If Congress fails to raise or suspend the debt limit this fiscal year, the Treasury may exhaust these extraordinary measures, potentially leaving the government unable to satisfy its obligations. This could lead to a government closure, payment delays, or, in the worst-case scenario, a default on the US government debt. In a letter to congressional leaders this week, US Treasury Secretary Janet Yellen warned that the US might default on its debt obligations as early as June 1.

Yellen predicted that if Congress does not raise or extend the debt ceiling by early June, the Treasury may not be able to meet all federal obligations. Experts forecast a 45 percent drop in the US stock market and a global financial crisis if a default occurs.

Notable is that President Joe Biden is not coming to terms with Congress's conditions on the debt ceiling, amidst the immense pressure exerted by Republicans against Biden due to political calculations, which has led to a severe gridlock in negotiations.

Currently, its national debt exceeds $31.4 trillion, which equates to around $94,188 for each American citizen, and it is constantly rising. It's a cause of serious concern for the largest economy in the world because of the serious consequences that come with high debt levels, such as inflation, default, and increased economic instability.

Since it is the largest economy, the monetary policy of the US has significant effects on global markets. Therefore, a change in its monetary policy could have a domino effect on economies around the world. The potential reduction in its borrowing would reduce the amount of dollars available in the international economy.

The potential impact on US aid contributions is a significant additional aspect of the US debt ceiling taking effect in 2023. The US is one of the main contributors to international aid, and a fall in its borrowing capacity could impact its ability to boost global economic growth. Many economies rely heavily on US aid; a sizable cut to this assistance could have a detrimental effect on the global economy.

The US is not the only nation with a high amount of debt, thus other nations wishing to cut their debt may need to follow in the US's footsteps, setting off a worldwide trend. This could lead to a rise in global interest rates, making it harder for governments and businesses to obtain credit, and ultimately affecting global economic growth. It may also make it more expensive for emerging economies to borrow money, which would hamper development efforts and exacerbate global inequality. Thus, while a debt ceiling may aid the US economy, it's crucial to evaluate its impact on the global economy.

The probable response from the US's creditors is yet another implication of the debt ceiling. Given that the US government is heavily indebted, its creditors, including China, Japan, and EU members, might see this as an indication that the US is about to default on its debts. Because of this, there may be less trust in the US dollar, which might cause it to lose value and raise the cost of borrowing for the US government.

Furthermore, imposing a cap on its debt could result in a situation similar to austerity measures, slowing the US economy's growth even further. This could have a knock-on effect on the global economy, primarily damaging international trade and investment. On a global scale, there may be much criticism of the effects of economic stability on US-international relations.

In contrast, the current trend toward de-dollarization suggests that some nations saw a cap on US debt as a chance to escape dollar hegemony. It will let other states to increase their sway over global economic sectors and offer alternatives to the US dollar as the primary reserve currency. They could accomplish this by decreasing their economic dependence on the United States, ultimately challenging the paradigm of global economic influence.

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