US Debt Limit Stagnant

In the US economy, which is dominated by rising interest rates and recessionary concerns in the face of high inflation, the debt limit dilemma stands out as a new risk factor set to rock markets.

As the federal government hit the $31.4 trillion debt limit yesterday, the US Treasury Department began implementing extraordinary measures to prevent the country from defaulting.

In this context, new investments in the Public Service Pension and Disabled Fund and the Postal Service Retiree Health Benefit Fund were suspended until June 5.

DEMOCRATS SUGGEST INCREASING THE DEBT LIMIT

The measures taken by the US Department of the Treasury are intended to prevent the increase in the level of general indebtedness by using the financial resources of these pension funds, while continuing to make federal payments.

At the same time, the measures taken by the Ministry give Congress time to raise or suspend the debt limit.

Republicans, who just won a majority in the House of Representatives, favor major spending cuts in the debt limit negotiations.

Democrats insist on raising the debt limit, while rejecting Republican proposals to cut certain spending.

There is concern that the debt limit issue, which has become an impasse between Democrats and Republicans, will rock markets in a few months. As US recessionary expectations strengthen, the bipartisan showdown over the debt limit is riskier than ever.

Economists say that if Democrats and Republicans fail to reach a deal to avoid default, the shock could plunge the world into recession and financial crisis.

WHAT IS THE DEBT LIMIT?

The debt limit, or debt ceiling, which was first introduced in the United States in 1917, means “the upper limit on the amount of money the United States government can borrow to pay its debts.” .

Congress passes a budget each year that includes government spending on infrastructure, programs like Social Security, and federal employee salaries.

The government, which also taxes the people for all these expenses, spends more than it earns for years and increases the federal deficit.

The government needs to borrow money to continue the payments that Congress has already approved. The debt limit limits the amount of debt the US government can take on to pay its “bills.”

The US Treasury has the authority to borrow up to the limit set by law by the US Congress.

The current debt limit stands at about $31.4 trillion.

WHAT HAPPENS IF THE DEBT LIMIT IS REACHED?

If the debt limit is reached, the federal government cannot increase the amount of debt. For this reason, you can only spend the cash and income you have. In order to increase the limit, it is necessary to obtain the permission of Congress through the passage of a law.

The US Treasury, on the other hand, can take some extraordinary measures to keep the government meeting its financial obligations.

These measures include accounting techniques that temporarily reduce the amount of US Treasury bonds issued to various government accounts. In this context, new investments in funds such as pension funds may be suspended or repaid to security holders before maturity.

If the debt limit is not increased, the US Treasury faces the problem of being unable to spend because it cannot borrow new money.

Although the payment of US debts is also in trouble, the country defaults if it fails to meet its financial obligations.

RISK OF DEFAULT

The US economy, already facing high inflation and recession concerns, is at risk of “default” as it hits the debt limit.

Economists warn that the consequences of the country’s default could be serious. Claiming that this situation will create chaos in financial markets and undermine the economy, economists point out that the country’s economy may enter a severe recession.

It is reportedly difficult to give an exact date on the country’s default risk due to variability in government payments and revenue, while US Treasury Secretary Janet Yellen believes this is unlikely. happen before June.

US DEFAULT ALSO AFFECTS GLOBAL MARKETS

It is claimed that a US default may negatively affect not only the domestic economy but also global markets.

It warns that the effects of the country’s inability to pay its debts on financial markets could be “terrible.”

The US dollar is consolidating its position as the world’s reserve currency, thanks to the global belief that the US government can always pay its debts.

Banks, finance companies, corporations, and countries use trillions of US dollars and Treasury bonds to back their assets and conduct international transactions, making the US indispensable in the global financial system.

Both US dollars and Treasury bonds are considered among the safest assets in the world. It is claimed that a US default could undermine confidence in the US dollar and Treasuries and trigger a crisis of confidence that could rock the global financial system.

MAY CAUSE FLUCTUATIONS IN THE MARKETS

Desmond Lachman, a senior specialist at the American Enterprise Institute (AEI), told Anadolu Agency (AA) that the debt limit is “a limit that Congress has set on how much the government can borrow”, and when reaches this limit, the government is forced to cut spending or raise taxes to avoid exceeding it.

“Similar to 2011, this could cause significant volatility in the US and global markets, as the likelihood of the US defaulting on its debt obligations increases,” Lachman said. saying.

Noting that a “crash” could occur in the US and global markets if the country actually defaults, Lachman said he hopes Congress and the administration will come to an agreement to increase the debt limit as in the past.

Noting that it seemed unlikely that the two sides would reach an agreement until the last moment, Lachman said: “Over the next few months, this issue is likely to increase market uncertainty both at home and abroad.” saying.

DEBT LIMIT WAS FILLED BEFORE 2011

The federal debt limit, which is a frequent problem in the US, was previously reached in 2011.

Following this development, the international rating agency Standard & Poor’s downgraded the US rating from “AAA” to “AA+” for the first time in history. Fitch Ratings, on the other hand, has placed the country’s rating on negative watch.

Congress had raised the debt limit on August 2, 2011, allowing the crisis to end before it deepened further. (AA)