The United States... Could the world's richest and most powerful economy run out of money?

It may seem silly to talk about the possibility of running out of money from the United States, the richest and most powerful economy in the world, but this may become a reality at a time when the controversy continues within Congress over President Joe Biden's new budget plan, which includes a $ 3.5 trillion increase in spending.

In a report published by the British newspaper "The Telegraph", writer Tim Wallace says that the US government's debt is scheduled to reach $28.5 trillion in mid-October, thus reducing the liquidity in the Treasury.

In a worst-case scenario, the government could default on its debts, causing the Treasury to run out of money, which would cause "irreparable damage to the US economy and financial markets," according to Treasury Secretary Janet Yellen.

According to the author, these risks arose due to the high levels of government borrowing for a long time, with the imposition of monetary limits on the total debt.

Even before the emergence of the Covid-19 epidemic, the United States faced a deficit of about one trillion dollars in 2019, and it rose to more than 3 trillion in 2020, and it rose again during the current year.

The International Monetary Fund expects the US debt to rise to more than $30 trillion in the coming years, three times its level in 2010.

The International Monetary Fund expects the US debt to rise to more than $30 trillion in the coming years, three times its level in 2010.

The writer explains that the differences, regarding the adoption of the budget and the determination of fiscal policies, have become over the past decade a driver of political disputes, as each party uses the votes of its members in Congress to obstruct the plans of the other party.

Under the Obama administration, when Biden served as vice president, Standard & Poor's (S&P) stripped the US of its AAA credit rating amid the debt ceiling crisis.

Some "crazy ideas" were put forward - in the writer's words - including a trillion-dollar coin minting, to avoid a debt default.

Former President Donald Trump wanted a huge budget to fund the construction of a wall along the Mexican border, which led to a prolonged clash in Washington and disrupted the federal government for 35 days between 2018 and 2019, leaving 800,000 federal employees unpaid.

The writer points out that the current differences include the desire of Democrats to win some Republican votes to share the consequences of the high volume of debt, and the concern of others about the ambitions of President Biden.

party game

“There is a partisan game between Democrats and Republicans, and the best solution would be to introduce the debt ceiling into the settlement bill and pass it along with the government budget,” says Luigi Speranza, chief economist at BNP Paribas.

The worst-case scenario - adds Speranza - is not to solve the problem of budget financing and setting the debt ceiling, and this matter will have somewhat serious consequences.

Janet Yellen: Running out of cash would cause irreparable damage to the US economy and financial markets (Reuters)

In the past, the US avoided defaulting with disputes that had short-term effects on the economy, as government departments continued to operate, and employees were paid once the political deal was struck.

But if things get worse and the debt ceiling crisis, and the resulting default, continues, this will have dire consequences in the United States and the world, according to the author.

“If it changes people’s perception of the US’s fiscal ability and willingness to pay its debts, it will lead to higher interest rates,” says Randy Kreuzner, a former member of the Federal Reserve Board of Governors. “If the government rate goes up, borrowing costs will be higher for everyone.”

This means lower investment and lower economic growth, which could affect global markets and lead to higher borrowing costs in the UK, for example.

slowing growth

It's all about "political plays," says Mickey Levy, an economist at Berenberg Bank. "The debt ceiling becomes a focal point for conservatives when they protest persistent spending deficits, and for progressives to blame Republicans for what's happening."

But in reality - the economist adds - the deficit and the high level of debt result from spending policies, taxes and economic conditions.

In fact, "politicians do not want to cut spending or raise taxes enough to balance the budget and curb rising debt."

Assuming a solution is found before things get worse, the economist expects the deal to relate to the president's infrastructure plan, "since Biden and Nancy Pelosi desperately need a political victory."

On the other hand, Jan Hatzius, an economist at Goldman Sachs, believes that the economic stimulus package must be reduced for the sake of consensus, and says, “To gain the necessary support, we expect Democratic leaders in Congress to reduce the proposed bill from 3.5 trillion dollars for a period of 10 years to about 2.5 trillion."

The writer concludes that slowing growth due to fears of high debt volume may lead to a downgrade of the credit rating of the United States from other agencies, such as Fitch Ratings, which look at current indicators negatively, which is what James Knightley of ING Group says ) It could pose a threat to markets and dampen global growth.