As America lurches towards an unprecedented default, attention is turning to the “economic calamity” it would trigger across the globe.
The nation is running out of cash – fast – 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 – for the first time ever – as soon as June 1, according to Treasury Secretary Janet Yellen, who said it would cause “an economic catastrophe” both in the US and across the planet.
So far, negotiations have stalled, with Democrats accusing Republicans of holding the American people hostage and playing politics with people’s livelihoods.
And as the world’s largest economy, a US default would send shockwaves across the world that would be inescapable for us all.
Ms Yellen is currently in Japan for a meeting with G7 finance ministers and central bankers.
She told reporters on Thursday that a default would unravel the work that had been done to repair the economy in the wake of the Covid pandemic.
“A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further,” she said.
“A default is frankly unthinkable.
“America should never default. It would rank as a catastrophe.”
Kazuo Ueda, Japan’s central bank governor, agreed and said a default would be a “big problem” and that: “ … the Fed alone, for example, may not be able to counteract it”.
Congressional leaders met on Tuesday to try and resolve the crisis, but the meeting ended in a stalemate.
They will meet again on Friday US time in a desperate attempt to broker a solution.
Trump pushes for disastrous default
While experts are united on the desperate need to avoid a default, former US president and 2024 presidential hopeful Donald Trump has taken a dangerous stance, dismissing the risks posed by a default.
“It’s really psychological more than anything else. And it could be really bad, it could be maybe nothing, maybe it’s a bad week, or a bad day, who knows?” he said of a potential default.
Mr Trump also alarmed critics by overtly urging Republicans against striking a deal with the Democrats.
“I say to the Republicans out there, congressmen, senators, if they don’t give you massive cuts, you’re gonna have to do a default,” he said during a chaotic live broadcast on CNN.
“And I don’t believe they’re going to do a default because I think the Democrats will absolutely cave, will absolutely cave because you don’t want to have that happen. But it’s better than what we’re doing right now because we’re spending money like drunken sailors.
“Well, you might as well do it now, because you’ll do it later. Because we have to save this country. Our country is dying. Our country is being destroyed by stupid people, by very stupid people.”
When asked by CNN host Kaitlan Collins ”why is it different now that you’re out of office”, in reference to his previous argument against using the debt ceiling as a leverage tool, Mr Trump replied: “Because now I’m not president”.
Republicans voted to raise the debt ceiling three times when Donald Trump was president, with no preconditions.
In fact, the debt ceiling has been raised, extended or revised 78 times since 1960.
However, while Democrats tend to avoid using the debt ceiling as a political tool, Republicans have been doing it for the past decade, leading to accusations of “brinkmanship” – a term used to describe the practice of pursuing a dangerous policy to the limits of safety before stopping, especially in politics.
Meanwhile, analysts have provided sobering details of the chaos that would ensue if a default took place, with the government failing to pay its bills including wages, welfare and other payments, and triggering a recession with soaring interest rates and a drop in equity prices and GDP.
Moody’s Analytics predicts that a long default would see 7.4 million job losses in the US alone, with the housing market and retirement savings also decimated.