Talks between President Biden and the opposition over raising the US debt ceiling scheduled for the 12th have been postponed to next week.
President Biden has said that depending on the outcome of the talks, he may stay in the United States and not visit Japan at the G7 Hiroshima Summit to be held next week, and the future of the negotiations is attracting attention.
What is this problem with the US debt ceiling?
What happens if Congress doesn't approve and defaults = default?
I will explain it in an easy-to-understand manner.
In the United States, in order to maintain fiscal discipline, the government issues government bonds and sets a maximum limit on how much money can be borrowed. Raising this limit would require congressional approval. If Congress does not approve it, the principal of the national bond cannot be redeemed or interest payment will be made, and default = default.
U.S. government bonds are known as reliable and safe assets.
In addition to its price and yield trends being benchmarked in global financial markets, it is an important asset manager held by investors and foreign governments around the world.
Therefore, if investors are aware that default = default, it may cause major confusion in the global financial markets.
In particular, as financial instability simmers due to a series of bank failures, it will lead to serious problems such as further deterioration of the management of banks in the United States that hold government bonds.
In the United States, Democrats and Republicans have often led to political conflicts over this debt ceiling due to their differing views on fiscal discipline.
This issue has led to several government shutdowns and a downgrade of U.S. government bonds in 2011.
At that time, the Obama administration and the ruling and opposition parties finally passed a law to raise the debt ceiling, and the worst case scenario of default was avoided.
However, Standard & Poor's, a major credit rating agency, decided that the budget deficit reduction plan agreed by the U.S. government and Congress was insufficient for fiscal stability and decided to downgrade it, causing turmoil in global financial markets.
The current debt ceiling is more than $31.3800 trillion, more than four times the $20.7 trillion 3800 years ago.
Earlier this year, Treasury Secretary Yellen announced in January that she had begun special measures to secure temporary funding as government debt increased and reached this limit.
Although this measure avoided a default on U.S. government bonds for the time being, Treasury Secretary Janet Yellen made it clear in a letter to House of Representatives Speaker McCarthy and other congressional leaders on January 4 that the ad hoc measures could stall and default on their debts as early as next month.
He then called for the Parliament to respond promptly to the increase in the ceiling.
On the other hand, the opposition Republican Party has called for the government to require significant spending cuts as a condition for raising the cap, but the Biden administration has refused to do so, and has not come to terms with this.