As the June deadline approaches for the U.S. federal government to reach its current statutory debt limit of $31.4 trillion, the lack of consensus among U.S. Congress regarding the debt ceiling issue has sparked widespread concerns. On May 9, local time, President Biden and leaders from both parties held negotiations on the U.S. debt ceiling issue, but they failed to reach a consensus. Hence, a press conference is expected to be held on the 21st to discuss the issue again.
The U.S. debt ceiling refers to the maximum limit set on the total amount of borrowing by the United States to ensure the fulfillment of government funding and its fiscal obligations. Due to the federal government's budget deficit (i.e., expenditures exceeding total revenue from taxes and other sources), substantial amounts of money must be borrowed to pay the bills. The government's financial obligations include funding for social security networks, payment of national debt interest, and military salaries. Approaching the debt ceiling often prompts calls from lawmakers to reduce government spending. However, raising the debt ceiling does not authorize any new expenditures. In fact, it only allows the United States to spend money on projects already approved by Congress.
Currently, approximately 70% of U.S. debt is held by the U.S. banking system, while the remaining 30% is held by foreign investors and central banks of other countries, including Japan, which held $1.1 trillion as of the last quarter of last year, China with $980 billion, the UK with $870 billion, India with $220 billion, and other countries. Additionally, investment funds and sovereign wealth funds located in the Middle East, Norway, and other regions also hold a significant amount of U.S. debt.
If a drop in U.S. Treasury bond prices triggers a wave of sell-offs, a shortage of buyers for U.S. debt could lead to a liquidity crisis. This would directly impede the effectiveness of the Federal Reserve in implementing monetary policies and further complicate the efforts of central banks worldwide in controlling inflation. It is certain that a default on U.S. Treasury bonds would have extremely negative "butterfly effects," including a stock market crash, the shaking of the U.S. dollar's status, and the impact on the economies of other countries.
Although the global risks brought about by a U.S. debt default would be enormous, historical experience from past U.S. debt ceiling negotiations suggests that Congress is likely to reach an agreement at the last moment, even if it seriously damages the confidence of businesses and consumers, increases short-term borrowing costs for taxpayers, and has a negative impact on U.S. credit ratings.
Over the past 63 years, the U.S. debt ceiling has been raised 78 times. In December 2021, Congress raised the debt ceiling by $2.5 trillion to the current $31.4 trillion. In fact, as early as January 19th this year, the U.S. debt had already exceeded the $31.4 trillion limit, but the Treasury Department implemented extraordinary measures to prevent a technical default on the debt. These measures included selling existing investments, suspending reinvestment in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, and pausing reinvestment in the Thrift Savings Plan's Government Securities Investment Fund for the Federal Employee Retirement System.
Although the possibility of a U.S. default is very low, if it were to occur, it would impact significantly the global financial system. A U.S. debt default would have far-reaching consequences for global financial markets, economies, and trade.
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