The U.S. Debt Ceiling debate continues (part 2)
The debt ceiling debate is starting to become increasingly worrying. The debt ceiling can have far-reaching implications for the global economy. With each passing day, the probability of a violation rise, as well as the potential economic damage it can bring.
Please read the previous article about the debt ceiling before you continue
If the debt ceiling debate leads to violation, then the economic consequences will be dire.
Stephen Junuea's new estimate for deficit FY23 (Fiscal Year 2023) is 1.35 trillion. That increases the probability of a debt ceiling violation over time.
The deficit is 5.1% of GDP. Because of this, the estimated date when the US Treasury Department will run out of funds has been moved up to early August, but it could even happen in July. They will no longer be able to pay for most of their normal daily expenditures.
This estimated x-date (estimated date when the US Treasury Department will run out of funds) is important to watch as the Treasury Department will be forced to balance the budget on a day-by-day basis when the x-date is reached.
When this happens, it will send shockwaves through the financial system. Out of this, more than 40% of traditional outlays would have to be suspended.
Traditional outlays refer to the money the US government spends on different programs such as Social Security, Medicare, Medicaid, defense, and welfare.
I'm keeping the newsletter short for the day. I had to go to the dentist today early, so I couldn't start writing early in the morning
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US Debt Ceiling and its Potential Consequences
Another concern is the risk of a miscalculation. The x-date is unpredictable. Treasury Secretary Yellen will likely argue for an earlier date, which can lead to doubt among negotiators.
She will likely argue for an earlier date because that gives her more flexibility and certainty in managing the Treasury's cash flow and operations.
The game of chicken has been playing out for weeks. Again, the debt ceiling limits how much the government can borrow. The debt limits concerns have been used for political debates for decades.
It's important to understand the background issue. Every year, the government spends more money than they earn. The government must borrow from. At a certain point, the government has a debt higher than the limit set by Congress (known as the debt ceiling)
Since the Budget Control Act of 2011, Congress must agree to raise the debt ceiling. If Congress does not, the US won't be able to meet its financial obligations and could potentially default on its debt.
In the past few weeks, Congress has been unable to agree on an increase in the debt ceiling, which can lead to the possibility of the US defaulting on its debt if they don't agree.
If the debt ceiling is violated, the central banks may need to freeze the debt market, which would be a major blow to market confidence, risk assets in the financial markets, and credit worthiness of the United States would also face a downgrade. As a result, it will be more expensive for the US to borrow in the future.
Finally, a long-lasting freeze in the debt ceiling could trigger a worse recession or depression since World War 2.
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