By Ahmed Adel | May 26, 2023
On May 22, US Treasury Secretary Janet Yellen warned that the
country may be unable to service its debt by June 1 unless Congress
raises its ceiling or suspends it. In turn, President Joe Biden
ruled out the declaration of default. At the same time, despite all
the predictions of doom and gloom, the US could benefit from a
default, especially to wreak havoc on the international economy and
competitors.
In the US, the amount of public debt is limited by law.
Currently, it has reached $31.4 trillion. It is up to the US
Congress to raise the national debt ceiling, but this year the
issue became a major contention between Republicans and Democrats.
The Republican party, with a majority in the House of
Representatives, set a condition: it will vote to raise the ceiling
if the Democratic government accepts significant cuts in budget
spending.
Specifically, the Republicans propose cutting tax credits for
the purchase of electric cars and the installation of solar panels,
as well as reducing public spending on the repayment of educational
loans. For Democrats, if they want to win the 2024 presidential
election on their terms, these conditions are unacceptable.
No economic reasons for default prevent raising the public debt
ceiling. Still, there are political reasons. The Republican
majority in the US House of Representatives want to bring greater
accountability to the Biden Administration, which has been making
economic decisions without consulting Congress. The Republicans
hope to catch the Biden Administration, the Federal Treasury, the
State Department, and the Defense Department violating American
law.
There is a low chance of default in Washington, but this does
not rule it out entirely because a default can be used as a
financial weapon capable of unleashing a global economic crisis
which will also affect the USs main competitors. It is much easier
and more politically legitimate to default in the context of
increasing global military and political tensions. For this reason,
it cannot be entirely ruled out that Biden will pursue such a
path.
Likewise, the US could use default to influence other countries.
Despite the enormous debt figure of $31.4 trillion, the external
debt is only $7 trillion. Consequently, some countries which
Washington will want to target economically and geopolitically may
be the victims of this default.
Even so, the main thing for the US is not to let doubts about
the sustainability of its economy and debt loom. If a default
occurs, it will be more difficult for the US to obtain loans.
For this reason, the probability of default is low because many
tools exist to avoid it. Article 14 of the Constitution could be
invoked, which states that the US debt cannot be called into
question. Also, the Federal Reserve could easily double its balance
sheet and buy all foreign debt......