Currently, the US government is playing one of the most expensive games of chicken in history.
The biggest economy in the world will go into default on its $31.4 trillion (£25tn) debt if Democrats and Republicans cannot come to an agreement to allow the US to borrow more money, or, in their vernacular, increase the debt ceiling.
They have until the menacing-sounding “X-date” of June 5 to come to an agreement.
What may it mean for other nations – and for you – if they don’t, though? The economy will deteriorate
First things first: according to every expert the BBC consulted, the US will not default on its debt.
However, Simon French, chief economist at investment bank Panmure Gordon, claims that if it did, “it would make the global financial crisis look like a tea party” in reference to the 2008 banking sector’s almost complete collapse.
If the US doesn’t raise its debt ceiling, it won’t be able to borrow any more money and will soon run out of money to pay for obligations like public benefits.
The ability of individuals to spend and pay their expenses will be negatively impacted, according to Russ Mould, investment director at AJ Bell. “Therefore, the economy would be affected.”
If the government is unable to achieve a debt ceiling agreement for an extended length of time, according to the White House Council of Economic Advisers, the economy may contract by as much as 6.1%.
The president of Queens’ College at Cambridge University and economist Mohamed El-Erian claim that a default would “likely tip the US into recession.”
For the rest of the globe, many of which count the US as a crucial trading partner, that would have significant knock-on implications.
One of the largest trading partners worldwide is the US. The purchase would be made. One of the largest trading partners worldwide is the US. It would mean purchasing fewer goods from other countries, according to him.
Mortgage rates could increase.
Mr. French claims that a US default would harm commerce, increase the cost of mortgages in other nations, and possibly increase unemployment.
He replies, “It would be pretty cataclysmic.”
Why might issues in the US cause mortgage rates in other nations to rise?
A bond or an IOU is what a government issues when it needs to borrow money. It is known as a Treasury bond in the US. If the government purchases Treasury bonds, an investor will charge interest.
Investors will consider this and wonder, “Well if the US can default, what’s stopping the UK from defaulting?” if the US government does not pay its debt in full or even the interest. Mr. French opined.
The cost of purchasing government debt might then be greater due to investor demand.
“Interest rates on debt – be it your mortgage debt or public debt – they take their cue from how much risk is perceived and clearly [a US default] would be a massive risk event and therefore all debt would become more expensive overnight,” he claims.
In reality, borrowing will probably cost more in general for firms, governments, and individuals.
“US government debt is considered, in many ways, as a risk factor,” says Andrew Hunter, deputy chief US economist at Capital Economics. According to Capital Economics’ Andrew Hunter, deputy chief US economist, “US government debt is viewed as a basis of the global financial system in many ways.
All in all, it would affects all walks of life to a greater extent.
