Timothy Geitner once discussed the implications of what would happen if Congress did not raise the debt ceiling and how it would impact everyone. The current debt to GDP ratio of the US is 110%, but it’s actually much higher than that if you include unfunded obligations like Social Security, Medicare, and Medicaid. We have to understand the implications of default. Essentially, if Congress declines to raise the debt ceiling the US Treasury Department can no longer issue bonds and the federal government wouldn’t be able to fund all its obligations. According to Jerome Powell, we are going to need another stimulus package and could be looking at a deficit of over $5 trillion, a number which normally takes five years to reach.Īll of the predictions made in the past have all been accelerated because of the increased deficit spending this year.įor governments, it’s more attractive to raise taxes than it is to default on their debt because of the devastating consequences of doing so. The reality of our financial situation as of May of 2020 is the US is on course for a $3.7 trillion deficit this year.
What we do know is that the sooner it happens to smaller the impact will be, but that doesn’t seem like it’s going to be the case. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.The US is very likely to default on its debt at some in the future, but we’re just not sure exactly when. Jim Leaviss is the chief investment officer for public fixed income at M&G Investments. You can listen to his podcast, Uncle Jim’s World of Bonds, on Spotify and AppleĪny opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In the meantime, watch out as the US’s reputation for fiscal and political competence takes a hit – global markets and economies won’t like that. This seems like a failure of the methodology. The AA+ credit rating only tells you that S&P expects you’ll get $100 paid to you, not that you’ll be able to buy the same amount of goods with it as you used to. Your bond would only buy you half as many Big Macs come 2029. But because investors get their $100 back when the bond matures, rating agencies are happy. A government could inflate away its liabilities (10% inflation halves the ‘real’ debt burden over seven years). That, for me, is a problem with the credit rating agencies – when looking at the US, the real risk for investors is normally around inflation. Why would a sovereign nation with the ability to print its own currency, ever need to restructure its debt? However, there is little likelihood that investors (including China and Japan, which each hold more than $1tn of Treasuries) will take a haircut on this debt. Expect a missed coupon payment to cause chaos in global financial markets. Their yields set the risk-free rate for the global economy – and from that, we value equities, real estate and everything else. US Treasury bonds are the foundation assets of the global economy – all other sovereign bonds are compared with them. Well, yes, and especially if the US does default on an interest payment, even if that default is more technical rather than a formal debt restructuring resulting in losses for investors. So, should we expect to see further US credit rating cuts? S&P also then worried greatly that the absence of bipartisan consensus on fiscal policy put America’s credit rating on a weak footing – fears that must surely be higher now. Today it has become a political tool used to try to ruin Joe Biden’s fiscal stimulus plans and make him look weak. The debt ceiling was originally intended to prevent a president from increasing spending to fight foreign wars. But this isn’t entirely new President Obama faced a similar crisis in 2011 when the Republican Party also refused to increase the debt ceiling.
We know how we got here – the polarisation of American politics and the toxicity of the Trump years has led to some 70% of Republicans not accepting Biden’s presidency as legitimate. US Treasury Secretary Janet Yellen says a default would trigger a recession and a stock market plunge, while credit rating agency Moody’s says it would cause Americans to ‘pay for this default for generations’. The most powerful nation in the world, the US, stands on the brink of a self-inflicted debt default.Ī sticking plaster has been put in place until 3 December – thank goodness for that – but let’s not be shy about the consequences if the worst happens.
0 kommentar(er)
