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Iceberg of accumulated problems: U.S. Treasury warns of the threat of default for the country

Photo by Federico Respini on Unsplash

In less than a month the U.S. is at risk of default if the authorities do not decide on the ceiling of the national debt, U.S. Treasury Secretary Janet Yellen warned in a letter to Congress.

According to her, if lawmakers will delay a decision until the last moment, it could cause serious damage to business and consumer confidence, lead to higher cost of short-term loans to taxpayers and have a negative impact on the credit rating of the United States. In turn, the lack of any consensus will not only hit the economy, but also call into question the “global leadership” of the United States, the head of the Treasury warned.

According to the U.S. Treasury Department, in the calendar year 2022 U.S. national debt grew by $ 1.8 trillion and exceeded the limit of $ 31.4 trillion set by the authorities. The government began to run out of money to fulfill its obligations, and in January the Treasury Department announced emergency measures. In particular, it was decided to temporarily abandon some budget expenditures in order to postpone the default and give Congress time to discuss a new debt ceiling.

The U.S. national debt is the total debt of the nation’s federal government to creditors. Washington borrows money to pay for all necessary expenditures that can no longer be covered by budget revenues.

For this purpose, the country’s authorities mainly use special treasury bonds (treasuries). U.S. and foreign investors buy the securities issued by the U.S. Treasury and receive a steady income on them, essentially lending their money to the U.S. economy. These funds, in turn, go to pay off the budget deficit.

It is noteworthy that the largest holder of U.S. government debt remains the country’s government. At the end of fiscal year 2022 (ended September 30), the United States government and the Federal Reserve (which acts as the central bank) accounted for nearly 40% of the total debt. Another 23% of the liabilities belonged to foreigners, and the rest was owed by Washington to American investors, banks and companies.

The steady growth of the U.S. national debt is largely due to the fact that U.S. budget expenditures are increasing faster than revenues. Alexander Abramov, the head of the Laboratory of Analysis of Institutions and Financial Markets at the Institute of Applied Economic Research of Russian Academy of National Economy and Public Administration, told in a commentary.

“The U.S. government has begun to play a more active role in shaping support for industry and its companies in order to compete more successfully with Chinese concerns in world markets. In addition, social and military expenditures are growing. Socially, the authorities support part of the population after the pandemic, for example, they write off debts to young professionals who took educational loans,” said the expert.

Overall, U.S. budget spending has consistently exceeded cash receipts for over 20 years. During the same time the U.S. national debt has increased fivefold, and today its volume exceeds the size of the entire economy. According to the latest estimates of the Federal Reserve Bank of St. Louis, the ratio of US debt to GDP is about 120%.

Back in 1917, the U.S. government introduced the so-called debt ceiling for the first time. This is an artificial restriction, which was originally created to protect the country from excessive growth of borrowing.

However, against the background of constantly growing budget expenditures, the country’s leadership periodically has to either raise the limit or refuse to use it at all. And the discussion of this issue is usually accompanied by heated debates, and delaying the process each time pushes the country to default, experts say.

Recall that default means the borrower’s refusal to fulfill its monetary obligations. As a rule, it occurs due to the debtor’s lack of financial capacity.

The last time the U.S. faced a similar situation in 1979. Then the authorities were unable to reach an agreement on raising the debt ceiling in time. Eventually it was decided to raise the limit, but the U.S. Treasury did not manage to repay obligations worth over $120 million in time. Thus, the default that occurred was technical – temporary.

More than 30 years later, in 2011, the U.S. was again on the verge of default because of disagreements about the debt ceiling. Although the government still managed to pay its creditors on time, the international agency S&P downgraded the U.S. credit rating from the highest level AAA to AA+ for the first time.

“Raising the bar acts as a kind of control on executive power and budget spending. If the debt hits the ceiling, it becomes an excuse to revise some of the spending to lower it later. In the end, it all comes down to political bargaining. With elections coming up, the Republicans have a good opportunity to put pressure on the Biden administration.

At the end of April the Republicans won approval of their bill to raise the debt ceiling in the lower chamber of Congress by a majority vote. The authors of the document agree to raise the limit to $1.5 trillion, but require significant cuts in budget spending. They also propose returning unspent COVID-19 funds to the Treasury, canceling education debt forgiveness and eliminating tax breaks under the inflation reduction law.

However, as experts believe, the Republicans’ initiative is unlikely to receive support in the Senate, which is controlled by the Democrats. The representatives of the party, led by President Joe Biden, insist on raising the debt ceiling without additional conditions.

“Biden has refused to do his job, threatening to bring our country to its first-ever default, and time is running out. After three months of inaction by the Biden administration, the House of Representatives has acted, and a bill is now in the Senate that would push back the risk of default. The Senate and the president must get to work – and as soon as possible,” TASS quoted House Speaker Kevin McCarthy as saying.

According to the White House, Biden plans to meet with congressmen as early as May 9 to discuss the debt ceiling. Experts believe that in the end, the parties will have to seek compromise and make concessions to each other.

“I think as we get closer to the deadline, U.S. officials will once again be able to reach an agreement. In the near term, the U.S. will be forced to raise the debt ceiling to avoid the worst consequences of a technical default. And in the future, as the financial stability indicators deteriorate, the states will probably have to tighten control over the budget,” Mikhail Stepanian, senior strategist at Freedom Finance Global, suggested in a conversation with .

Nevertheless, the current situation surrounding U.S. government debt may result in a downgrade of the international rating for U.S. Treasury securities from today’s “safe” to “junk,” Russian businessman Oleg Deripaska did not rule out the possibility. Moreover, as the businessman believes, such a development would only be “the tip of the iceberg of the accumulated problems” of the United States..

“The U.S. has absolutely played around with using the dollar’s status as the world’s reserve currency. In the end, as incredible as it may seem, they are now one step away from bankrupting their own public finances, and the situation will only be exacerbated by the internal political games that will go on for the rest of next year. And the collapse of U.S. public finances would mean the complete destruction not only of the existing global financial system, but of the entire global world order,” Deripaska wrote in his Telegram channel.

However, in the case of further increase in U.S. public debt, its servicing will become more and more burdensome for the U.S. budget, experts say. Thus, recently the pressure on the U.S. treasury has already increased markedly against the background of the Federal Reserve System’s changed policy.

In 2022, after the introduction of energy sanctions against Russia in the United States sharply fuel prices increased, and inflation accelerated to the maximum in the last 40 years. To combat rising prices, the Fed began to sharply tighten monetary policy (monetary policy). In just over a year, the U.S. regulator raised its interest rate nine times, bringing it to 4.75-5% – the highest level in 16 years.

Traditionally, the tightening of monetary policy is considered one of the main tools in the fight against inflation. As a result of higher rates the cost of loans for citizens and businesses is increasing, economic activity is weakening, which puts pressure on prices. At the same time, due to the Fed’s actions, the cost of servicing the U.S. national debt increases.

According to the Congressional Budget Office, in 2022 the spending on interest payments on the national debt of Washington grew by 35% to $475 billion which is equivalent to 1.9% of U.S. GDP. Moreover, according to the forecast of the agency, in 2023, the amount will increase by a third – up to $640 billion (2.4% of GDP), and in 2033, it will exceed $1.4 trillion (3.6% of GDP).

If current trends persist in 2053 the government debt of the United States may almost double the size of the U.S. economy and reach 195% of GDP. By that time debt service will cost the U.S. government 7.3% of GDP annually and will become the largest item of the country’s budget expenditures.

In addition, as the organization notes, a further increase in interest costs will lead to a reduction in public investment, which could ensure economic growth in the future. So, in 2053, the U.S. government will spend on debt service almost three times more money than ever spent on education, non-defense infrastructure development, research and development, combined, the fund added.

“The long-term risks of rising government debt are that the dollar is becoming less attractive because of the country’s deteriorating macroeconomic performance. This creates risks for investments in treasuries and threatens the dollar’s position as the main reserve currency in the international market,” Sergei Suverov, investment strategist at Aricapital Management Company, said in a conversation with .

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