The United States is facing a situation unprecedented in its history: the risk of declaring technical bankruptcy if it fails to raise its debt ceiling by June 1. This deadline is getting closer and closer and negotiations between President Joe Biden and Congress are stalled by political polarization and the approaching elections.
What is the debt ceiling and why is it so important?
The debt ceiling is the maximum amount that the U.S. government can borrow to finance its public expenditures - such as payrolls, social programs, defense, or interest payments on debt. This limit is set by law and can only be changed with the agreement of Congress. The United States reached its current debt ceiling of $28.4 trillion on January 19. Since then, the Treasury has resorted to "extraordinary measures" that allow it to continue spending without exceeding the legal limit. However, these measures will run out on June 1, according to the Treasury's own estimates. If a new debt ceiling is not approved by then, the United States would run out of money to pay its obligations and would go into default. This means that it would not be able to meet its financial commitments to its domestic and international creditors, which would affect its credibility and credit rating.
What would be the impact of a U.S. bankruptcy on the world?
The United States is the world's leading economy and the issuer of the current international reserve currency, the dollar. Its bankruptcy would have a domino effect on the rest of the countries and markets, which depend to a great extent on its stability and solvency. According to Federico Steinberg, a researcher at the Elcano Royal Institute in Spain, the bankruptcy of the United States would cause a massive loss of confidence in the global financial system. This would lead to a flight to safe assets, such as gold or safe-haven currencies. This would lead to a fall in the value of the dollar and an increase in the cost of credit for companies and governments. In addition, a U.S. bankruptcy would negatively affect global economic growth, which has already been hit by the coronavirus pandemic. According to Steinberg, there would be a contraction in international trade and a reduction in aggregate demand, which would slow economic recovery and increase unemployment and poverty.
What would be the impact of a U.S. bankruptcy on developing countries?
Developing countries would be the most vulnerable to a U.S. bankruptcy, as they are more dependent on foreign trade, remittances, development aid and access to international credit. According to an article published by Cointelegraph (https://es.cointelegraph.com/news/the-united-states-on-the-verge-of-default-what-impact-would-it-have-on-the-world-and-on-developing-countries), written by Jose Antonio Lanz, the bankruptcy of the United States would have a negative impact on cryptocurrencies, which are used by many developing countries as an alternative to the traditional financial system. The article points out that the fall of the dollar would cause a depreciation of local currencies against bitcoin and other cryptocurrencies, which would hinder their adoption and use. In addition, the bankruptcy of the United States could generate greater political and social instability in developing countries, which already face multiple challenges such as the health crisis, climate change or armed conflicts. This could increase the risk of violence, forced migration or human rights violations.
Is there any hope of avoiding bankruptcy?
Despite the bleak outlook for the possible bankruptcy of the United States, some analysts are confident that a political agreement will be reached in extremis to raise the debt ceiling before June 1. This has been the historical trend in similar situations, such as in 2011, when the limit was changed two days before the deadline. However, this time around, political conditions are more complex and volatile than ever. President Biden is facing strong Republican opposition, which seeks to weaken his legislative agenda and his popularity before the next legislative elections. On the other hand, some Democratic sectors are also pressuring Biden to approve an ambitious public spending and tax plan without giving in to the Republicans. In this context, it is difficult to predict whether there will be enough consensus to avoid bankruptcy or whether partisan interest will prevail over national interest. The only certainty is that time is running out and that the whole world is waiting for the outcome.
A final comment
I find this issue very complex and sensitive, as it affects the economic and financial stability of the entire planet. I believe that U.S. political leaders have a responsibility to reach an agreement to raise the debt ceiling before it is too late and thus avoid a default that would have catastrophic consequences for the world. I am particularly concerned about the impact that bankruptcy would have on developing countries, which are already suffering from the aftermath of pandemics, climate change and poverty. I believe the international community should be prepared to help these countries in the event of a global crisis. As for cryptocurrencies, I consider them a very interesting and promising emerging technology, but not yet mature enough to be a haven of value because of their volatility and high risk, although I am certain that in the future they will be a viable alternative to the traditional financial system, I guess it depends on how they are regulated and used.
I would like to know your opinions, do you think the United States will manage to avoid bankruptcy? What role do you think cryptocurrencies have in this context?
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