“Risks of causing irreparable harm to the economy”: why in Washington they started talking about the threat of default for the United States

The volume of the public debt of the United States for the first time in history exceeded $ 31.5 trillion.

Such data on Friday, January 20, were presented on the portal Usdebtclock.org.

Over the past year alone, the indicator has increased by more than $1.5 trillion and has already overcome the $31.4 trillion limit set by the country's authorities.

This is evidenced by the materials of the US Treasury Department.

As the head of the department, Janet Yellen, said on January 13, in the current conditions, it is “vital” for the US Congress to once again raise the debt ceiling or suspend the limit.

Otherwise, the country's leadership may run out of funds to fulfill its obligations, and the country will face default.

To avoid such a situation, the US Treasury has decided to use emergency measures and temporarily abandon a number of budget expenditures.

It is assumed that these expenses will be deferred to a later period.

At the same time, as Yellen emphasized, the initiative will allow delaying the default until at least the beginning of summer, so Congress "needs to act without delay."

“The use of emergency measures allows the state to fulfill its obligations only for a limited period ... Failure to fulfill the obligations of the state risks irreparable harm to the US economy, the sources of income for all Americans and global financial stability,” the secretary wrote in a letter to congressmen.

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Recall that the US national debt is the total debt of the federal government of the country to creditors.

Washington borrows money to pay for all the necessary expenses that can no longer be covered with budget revenues.

To do this, the country's authorities mainly use special treasury bonds (treasuries).

American and foreign investors buy securities issued by the US Treasury and receive a stable income from them, in fact, lending their money to the US economy.

These funds, in turn, are used to pay off the budget deficit.

“It is curious that the largest holder of the American public debt is the US government itself, along with the Federal Reserve System (FRS), which acts as the country's central bank.

They account for almost 40% of the total debt, which means they practically owe themselves.

Foreigners own about 25% of the debt, and the main creditors today are Japan and China, ”Mark Goykhman, chief analyst at TeleTrade, told RT.

According to him, the steady growth of the US public debt is largely due to the fact that US budget spending is growing faster than income.

Moreover, over the past few years, this trend has only intensified, said Alexander Abramov, head of the laboratory for the analysis of institutions and financial markets at the Institute for Applied Economic Research of the RANEPA, in an interview with RT.

“The United States was forced to spend money to support the economy and the social sphere during the coronavirus pandemic.

In addition, business support programs have been widely developed in the country against the backdrop of competition with China and other states.

And, of course, Washington is increasing military spending, which also has an impact on the increase in public debt, ”Abramov explained.

In general, US budget spending has consistently exceeded cash receipts for more than 20 years.

During the same time, the US national debt has increased five times, and today its volume exceeds the size of the entire economy of the country.

The latest estimate from the Federal Reserve Bank of St. Louis puts the US debt-to-GDP ratio at about 120%.

“Increasing debt is more profitable than increasing taxes for budget revenues.

Especially now, when the risks of recession and contraction of the economy are high.

The fact is that the increase in taxes discourages business activity, investment and consumer demand, as well as economic growth in general.

Accordingly, the authorities prefer to attract more and more borrowed funds,” Mark Goykhman added.

Switching to unlimited

Back in 1917, the US authorities first introduced the so-called debt ceiling.

We are talking about an artificial restriction, which was originally created to protect the country from an excessive increase in borrowing.

At the same time, against the backdrop of constantly growing budget expenditures, the country's leadership periodically has to either raise the limit or completely abandon its use.

Moreover, the discussion of this issue is usually accompanied by heated debate, and the delay in the process every time pushes the country to default, experts say.

“Politicians compete with each other.

The party in power is trying to get more funds for the economy and social needs, and the opposition party is trying to cut budget spending.

At the same time, society feels that the debt needs to be reduced, but every time the authorities repeat that it is not the time yet and we need to wait,” said Alexander Abramov.

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Recall that default means the borrower's refusal to fulfill its monetary obligations.

As a rule, this happens due to the lack of financial resources of the debtor.

The last time the United States faced a similar situation was back in 1979.

At that time, the authorities failed to agree on raising the debt ceiling in a timely manner.

In the end, it was decided to raise the limit, but the US Treasury did not have time to pay off obligations in the amount of more than $120 million. Thus, the default that occurred turned out to be technical - temporary.

More than 30 years later, in 2011, the States again found themselves on the verge of default due to disagreements over the debt ceiling.

Although as a result, the government still managed to pay off creditors on time, the international agency S&P downgraded the US credit rating from the highest level of AAA to AA+ for the first time.

“The debt ceiling has already become something of a bargaining chip between Republicans and Democrats.

If the ruling party at this moment needs its opponents to vote for increasing the limit, it, as a rule, promises any preferences and indulgences for the opposition, ”said Alexander Razuvaev, a member of the supervisory board of the Guild of Financial Analysts and Risk Managers, to RT.

As stated on January 18 at the White House, at the moment, US President Joe Biden is not going to conduct any negotiations with the Republicans regarding the increase in the debt ceiling.

However, according to Alexander Abramov, in the end, the parties will still have to negotiate with each other and make concessions.

“They simply have no other options but to raise the limit.

The US is heading into recession, so any spending cuts will be very painful for the economy and the pockets of ordinary Americans.

The parties are now preparing an election campaign, and it is the public debt that will become one of the instruments of the presidential fight, ”said Abramov.

"Biggest expense"

Meanwhile, a further increase in public debt will become increasingly burdensome for the US budget, experts say.

At the same time, according to experts, the current policy of the Fed may put additional pressure on the US treasury.

So, in 2022, in an attempt to curb inflation, the Fed raised its interest rate seven times (from 0-0.25% to 4.25-4.5%) and brought it to the highest level in the last 15 years.

Moreover, in 2023, the regulator intends to continue to increase the rate.

Traditionally, tightening monetary policy is considered one of the main tools in the fight against inflation.

Thus, as a result of the increase in rates, the cost of loans for citizens and businesses is growing, economic activity is weakening, which puts pressure on prices.

At the same time, due to the actions of the Fed, the cost of servicing the state debt of the States is also increasing.

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According to the forecast of the US Congressional Budget Office, in 2023, Washington will spend about $442 billion on interest payments on public debt, which is equivalent to 1.7% of US GDP.

Moreover, according to the calculations of the department, in 2032 the corresponding value will increase to 3.3%, and in 2052 debt service will cost the country already 7.2% of GDP.

“Over the next 30 years, interest payments will amount to about $66 trillion, and by 2052 they will take almost 40% of all federal budget revenues.

Also, in the coming decades, interest costs will become the largest item (budget. -

) expenses, ”the Peter Peterson American Foundation said.

According to the organization's assessment, as early as 2029, the United States will send more money to service the public debt than to defense, in 2046 - to Medicare (a health insurance program for the elderly), and in 2049 - to social insurance.

Moreover, as a result of the rapid increase in interest costs, funding for research and development, education, and infrastructure development can be seriously reduced.

“Any debt is a risk of an economic slowdown as debt financing takes more and more money.

This increases the likelihood of financial shocks.

If budget expenditures grow rapidly, it will become difficult to service the public debt.

Theoretically, this problem in the long term can cause a real default,” concluded Alexander Abramov.