A small chirp in the west can make huge waves across the globe. The news of United States facing debt related crisis has led to global markets turning red and orange in turn burning the investor pockets. Let’s try to understand fist what a debt ceiling is, and how the world’s largest economy i.e., the US got stuck in its trap.
Firstly, the term national debt refers to the outstanding financial obligation of a country. The government spends money on the economy like building infrastructure, providing benefits to the under privilege etc. The spending is done mostly from the revenues earned through federal income tax. If the revenues are lesser than the spending, a budget deficit results.
To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS). Therefore, the national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities. As the federal government experiences reoccurring deficits, which is common, the national debt grows.
About the United States, the country has carried debt since its inception. The debt started to rise and reached $75 million by January 1, 1791, due to the American Revolutionary War. Over the next 45 years, the debt continued to grow until 1835 when it notably shrank due to the sale of federally owned lands and cuts to the federal budget. Shortly thereafter, an economic depression caused the debt to again grow into millions and billions. At present, the US debt has exceeded $31 trillion for the first time in October 2022 and now stands at $31.4 trillion while writing.
Due to the soaring national debt, the US Treasury Department had to borrow more money to pay for government spending. The legislative curb on this borrowing is known as the debt ceiling. When the Treasury Department spends the maximum amount authorized under the ceiling, Congress must vote to suspend or raise the limit on borrowing. Efforts to raise or abolish the ceiling have become a topic of heated debate among the Fed policymakers where some have used negotiations on altering the limit to try to force spending cuts.
With the issue again on the table in 2023 under President Joe Biden and a Republican-controlled House of Representatives, economists are warning of catastrophic consequences if the Treasury Department can no longer pay the nation’s debts.
On 28th May 2023, President Joe Biden has urged Congress to pass a deal to raise the government's borrowing limit and prevent a potentially catastrophic default on US debt repayments. Some of the highlights of the deal are -the parties have not raised the debt limit but suspended it entirely until 2025 which allows them to pay their bills until that date and know that the next fight over raising the ceiling will not interfere with the presidential election. Also, there have been caps instilled on spending, but not defense.
With the public health emergency officially ended in May, Republicans have argued for the relief funds that were not spent to be returned which amounts to about $30 billion. Also, the Medicaid remains untouched in the deal, but the age at which work requirements are included for those on SNAP was raised from 50 to 54. Also, new rules in the deal will make it easier for both fossil fuel and renewable energy projects to get licenses. It will basically streamline the environmental review process and potentially get projects off the ground in a faster time.
The US debt ceiling crisis seems to have been averted for now. Now, all eyes will be on the decision that takes place before 5th Jun’23. The US President has urged Congress to pass a deal to raise the government’s borrowing limit. Even the US Treasury Secretary Janet Yellen has warned that an extension must be finalized by 5th Jun’23 to avoid a historic default that would send borrowing costs soaring.
For now, the risk sentiments have eased which is positive for the markets. The haven US Dollar Index has declined, benefitting many other shared currencies in turn. Speaking about the USDINR Spot (CMP: 82.71), the local unit is trading in a positive manner. However, as 5th of Jun’23 inches closer there is a high possibility that USDINR Spot may move higher towards 83-mark. Break of same could push the currency towards 83.20 and higher levels.