• Tue. May 16th, 2023

US debt ceiling: ’Doomsday scenarios’ as ‘X-date’ disaster looms

Experts are growing increasingly frantic amid fears America could default for the first time ever – which would send major shockwaves across the globe.

The nation is running out of cash, and tense negotiations are currently underway in Congress regarding the US debt ceiling, which currently sits at $US31.4 trillion ($A46.8 trillion).

Democrats want it to be raised immediately, while Republicans are pushing for a range of conditions such as spending cuts to be met before agreeing to lift the self-imposed borrowing cap.

If a deal to raise the debt ceiling is not reached soon, America could default as soon as June 1 – in just 16 days’ time – according to Treasury Secretary Janet Yellen, who said it would cause “an economic catastrophe” both in the US and across the world.

Now, attention is turning to a string of seven “doomsday scenarios” which could occur if a resolution is not found by the X-date.

According to expert predictions reported by The Washington Post, there are seven “doomsday scenarios” which could play out if America were to miss the X-date and default.

“It would be a lethal combination,” the Post reported Moody’s Analytics’ chief economist Mark Zandi as saying.

Firstly, Moody’s Analytics predicts share prices could fall by around one-fifth, which would see $US10 trillion ($A15 trillion) in household wealth vanish and decimate millions of retirement accounts.

The stock market turmoil would be one of the first major casualties of a default, with around 20 per cent falling from major indexes back in 2011 when the US was most recently at risk of defaulting.

Once the stock market started to crumble, shockwaves would spread through the wider economy, which could send the US economy into an abrupt recession as a result of falling wealth and a subsequent fall in spending, as well as a jump in interest rates and a decline in the property market.

Next, the nation’s 4.2 million government workers would be left in limbo, facing the possibility of working without pay.

Social security and Medicare payments would also be disrupted as the government loses its ability to pay its bills.

Yet another outcome could be skyrocketing borrowing costs for the government, which has traditionally been able to borrow money cheaply due to the perceived security of the US economy.

In fact, the Treasury’s borrowing costs have already risen “substantially for securities maturing in early June”, Ms Yellen revealed in a letter sent to congressional leaders on Monday.

Concerningly, the chaos would not be limited to the US, but would instead spread across the planet, especially given many countries buy US government debt given it is usually thought to be so safe.

And finally, the US dollar would plummet, along with confidence in the entire American political system, which could result in a major reduction in the percentage of foreign currency exchanges which currently happen in dollars.

‘Serious harm’

Meanwhile, Treasury Secretary Janet Yellen has again warned of an early June default in a note to House Speaker Kevin McCarthy.

“With additional information now available, I am writing to note that we still estimate that Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” she wrote.

“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.

“In fact, we have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June.

“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”

US President Joe Biden, Kevin McCarthy and other congressional leaders will meet again on Tuesday US time to discuss budget negotiations in a bid to avoid a default.

$88b to stop global disaster

In a statement late last week, the US Treasury revealed it had just $US88 billion ($A131 billion) of extraordinary measures left up its sleeve to pay the bills and keep the country afloat as the debt crisis rages on.

It was a major fall from the $US110 ($A164) it had just a week earlier, and represents just over a quarter of the $US333 billion ($A497 billion) of authorised measures still available to keep the government running under the debt limit.

And despite Mr Biden talking up this week’s meeting as a sign of progress, Mr McCarthy told reporters on Monday that they were “nowhere near reaching a conclusion”.

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