US debt ceiling crisis: What a default could mean for America, the world

Hectic negotiations are going on in Washington over the ongoing United States debt ceiling crisis. It has forced President Joe Biden to cancel his upcoming trip to Australia and Papua New Guinea. With Biden pulling out, the planned Quad Summit of leaders from the US, India, Australia and Japan has been called off. Wonder what’s really going on in the US that its president had to cancel his foreign trips. Why is there so much tension over the country’s spending limits? What happens if the US defaults and why should the world be bothered? It all sounds complicated but we explain. What is the US debt ceiling? The debt ceiling is the US borrowing limit – the amount of money that the government can borrow to meet its financial obligations, which includes payment to federal employees, the military, medical care and social security. It also includes the interest on the national debt and tax funds. Usually, the government increases its spending limits by raising or suspending the ceiling following a vote by the US Congress. This allows it to borrow more. The debt ceiling limit is currently at $31.4 trillion. It was last raised in 2021 when Democratic lawmakers in the US House and Senate increased spending limits. [caption id=“attachment_12608822” align=“alignnone” width=“582”] A view of the U.S. Capitol dome in Washington, DC. The Democratic and Republican leaders met with President Joe Biden at the White House as negotiations continue about raising the debt limit and avoiding a default by the federal government. AFP[/caption] The US hit its borrowing limit on 9 January and since then the US treasury department has undertaken several “extraordinary measures” to provide the government with more cash and avoid default. But it is only a matter of weeks before those are exhausted and the US is unable to make payments. US treasury secretary Janet Yellen warned earlier that the US will not have money to meet its financial obligations as soon as 1 June without more borrowing. On Monday, she reiterated that the government will run out of money if the US Congress does not raise or suspend the debt limit. She called on lawmakers “to protect the full faith and credit of the United States by acting as soon as possible”.

Why is there an impasse on raising the debt ceiling? The government’s decision to increase the spending limit was once routine but has now become increasingly politicised. Today, while Democrats control the White House and the Senate, Republicans have a majority in the House of Representatives. The two rival political parties do not see eye to eye – they have philosophical differences – and now there is a deadlock. The Republicans are cautious about government spending and for them, a rise in national debt is a reflection of a government that is out of control. Many feel that if the US continues on the current course, it will lead to economic and social disaster in the long run, according to a report by the BBC. [caption id=“attachment_12608832” align=“alignnone” width=“533”] Speaker of the House Kevin McCarthy and President Joe Biden speak before a meeting on the debt limit in the Oval Office of the White House. One outcome is becoming clear as Biden and Congressional leaders reach for a budget deal to end the debt ceiling standoff. AP[/caption] However, the Democrats look at the national government power as a way to improve the lives of Americans. They see raising the debt limit when necessary as housekeeping to maintain the operation of the government, the report says. Also read: Explained: How past US debt ceiling crises affected the economy and politics Is there a solution in sight? The two sides are divided and tension mounts as the June 1 deadline nears. Congressional leaders for both parties met with the US president at the White House on Tuesday. No deal has been reached yet. As the talks continue, Biden will need to be around and hence the White House cancelled part of his upcoming overseas trip. The US president is “optimistic” about the way forward on the negotiations after meeting US House speaker Kevin McCarthy and other lawmakers but emphasised that more work needs to be done. He said that the meeting was good and productive. “Avoiding an unprecedented default is a basic duty of Congress,” Biden said in a Twitter post on Tuesday. “And House Republicans know it — they avoided default three times under my predecessor, without once threatening our economy. Default is not an option.”

Avoiding an unprecedented default is a basic duty of Congress.

And House Republicans know it – they avoided default three times under my predecessor, without once threatening our economy.

Default is not an option.

— President Biden Archived (@POTUS46Archive) May 16, 2023

McCarthy told reporters that both sides are still far apart on a deal but it’s still possible to get an agreement “by the end of the week”. “We can raise the debt ceiling if we limit what we’re going to spend in the future,” he told reporters on Tuesday. The limitations include spending less on social programmes and food assistance. [caption id=“attachment_12608842” align=“alignnone” width=“552”] House Speaker Kevin McCarthy and Senate Minority Leader Mitch McConnell talk to reporters after meeting with President Joe Biden, Vice President Kamala Harris, House Minority Leader Hakeem Jeffries and Senate Majority Leader Chuck Schumer in the Oval Office of the White House. AP[/caption] What if the US defaults A default would be a historic first and it could be disastrous for the US. In a letter to Congressional leaders, Yellen wrote, “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.” “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” she warned. Millions of people in the US rely on benefits that could go unpaid and services that could be disrupted or halted completely if the government can’t pay its bills for an extended period. If the economy tanked due to default, more than eight million people could lose their jobs, government officials estimate. Millions of social security beneficiaries, veterans and military families could lose their monthly payments. Vital federal services including border and air traffic control could be disrupted if workers can’t get their government paychecks, reports The Associated Press. How will it impact the world? The US defaulting on its debt will impact economies the world over. Yellen previously warned that if the US does not raise the debt ceiling by early June, default would trigger an “economic and financial catastrophe”. It could lead to “global financial instability”. A potential default could lead to recession and lasting damage to the US leadership in the global economy. If the US plunges into recession, it puts other fragile economies at the risk of recession. [caption id=“attachment_12608872” align=“alignnone” width=“573”] US treasury secretary Janet Yellen issued another warning Monday about the US running out of money to pay for its financial obligations if Congress does not raise or the debt ceiling crisis. File photo/Reuters[/caption] A default would be followed by other countries reducing their dependence on the dollar as the international reserve and trade currency. As the Chinese yuan emerges as a strong challenger to the dollar, this is not good news. Apart from Being, the European Union, India, and Japan will try to push their currencies as the new standard-bearer, but this process will be messy, and it will take time, according to a report by Reuters. A post-default world will affect global trade, the price of oil and other commodities. “In the medium- to long term, there would be a global recession and higher costs of doing business for everyone involved. Money will be tight, and importers and exporters will face delays or maybe even find their jobs impossible for long stretches of time until the new global market dynamic has a chance to emerge,” the Reuters report says. Yes, a default will affect the US and take everyone down with it. [caption id=“attachment_12608892” align=“alignnone” width=“640”] Graphic: News18[/caption] What are the chances of the US defaulting? The good news is that default remains unlikely. The US has always managed to raise its debt ceiling – 78 times in the 63 years since the US Congress first enacted the debt limit. Mitch McConnell, a longtime Senate Republican leader, said this after last week’s White House meeting, “The United States is not going to default. It never has and it never will.” While McCarthy said that the two sides have not reached an agreement, he believed a deal was possible by the end of this week. When asked about the risk of a worst-case scenario, he told BBC News, “The great thing about that question is we’ve already taken default off the table.” With inputs from agencies Read all the Latest News, Trending News,  Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.