Why US debt ceiling debate is giving jitters to financial markets


The US economy is passing through a tricky phase. US Treasury Secretary Janet Yellen testified before the Senate Committee on Banking, Housing and Urban Affairs that the US government would run out of cash by October 18, 2021. She also laid down the disastrous impact on the US economy should the Congress fail to pass the bill to fund the government and raise the country’s debt ceiling limit.

Let’s try to understand the whole scenario. When the expenditure of the government exceeds its revenue, it borrows money to cover the difference. In the usual practice, governments borrow money by issuing treasury securities. To bring in fiscal responsibility, most of the countries put a limit on the amount of money that the government could borrow. Similarly, in the US, the debt ceiling was first enacted in 1917. And in 1939, an aggregate limit was placed on the government debt. The debt ceiling is thus a legal limit on the amount of money that the government can borrow. Currently, in the US, it is capped at around $28.5 trillion.

In the present scenario, if the government hit/not raise the debt ceiling limit, it could lead to a delay/default on its obligations. The US government would be forced to default on many of its obligations, including the social security payments. Though the US economy has been strongly recovering, the Covid Delta variant has slowed down the recovery progress. And the consumer confidence index has even hit a seventh month low in August.

A default in social security payments/salaries would negatively impact consumption expenditure, as the beneficiaries would cut down their spending or delay the payment for rent/utilities. In such a scenario, a default, or a threat of one can have a larger negative impact on the domestic economy.

First published in Economic Times


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