‘A catastrophe awaits us’: What the United States of America Treasury decided on because of the threat of default

Natalia Dembinskaya

The United States has hit a ceiling on public debt and can no longer borrow. In August, the Ministry of Finance introduced emergency measures to prevent the country from defaulting on its obligations. It is necessary either to urgently raise the bar of borrowing, or to suspend the operation of the relevant law. It is up to the Congress to decide, and then there are disagreements. Finance Minister Janet Yellen asks not to pull rubber: the situation is close to critical.
Huge debt
In the midst of the pandemic, huge costs and a printing press running at full capacity, the US national debt has exceeded the size of the economy. According to all forecasts, this should have happened only in ten years. But it happened much earlier – too much was spent on supporting the national economy.
In 2020, the authorities pumped almost $ 9 trillion into the economy. By the e-nd of March 2021, debt rea-ched 101 percent of GDP. This only happened once, right after World War II, in 1946. And now American finances are hitting the legal maximum for borrowing – 28.5 trillion dollars.
The situation is not new. After the 2008 crisis, the bar has been constantly raised. In 2019, Donald Trump signed a law allowing an unlimited increase in the national debt until July 31, 2021. Then – freezing. This means that the Ministry of Finance will not be able to raise additional funds through the sale of bonds.
But you can’t do without it. There is a record hole in the budget. It is patched up mainly by the sale of government debt securities. In fiscal 2020 (ended Septem-ber 30), the deficit more than tripled to $ 3.1 trillion.
Emergency measures
Thus, by August it was necessary either to raise the ceiling of the state debt, or to suspend the limit. However, this has not yet been done. The prospect of default loomed. The Mini-stry of Finance announced emergency measures.
Among them – a reduction in investments in the fund for the payment of old-age and disability pensions, the medical insurance fund for pensioners of the postal service and the state investment fund of securities. So far, this allows it to exist without increasing debt, while freeing up space for the Treasury to place bonds.
The head of department, Janet Yellen, asked Congress to make a decision “as soon as possible.” But for a month and a half, the matter did not get off the ground. According to the Democrats, it is necessary to act by a proven method – to raise the limit. Republicans are demanding that President Joe Biden and the government cut spending and cut huge debt.
The other day, Yellen said with alarm: there is no more time, inaction is fraught with a “large-scale economic catastrophe.” Over the past 60 years, Congress has raised or suspended the debt ceiling about 80 times and “must do it again.” Otherwise, the federal government will not be able to pay the bills in October.
“Raising the limit does not mean spending more taxpayer money. Basically, it’s increasing the credit card balance,” Yellen wrote to Congress. As early as October 1, the Treasury will have to cut spending by $ 150 billion.
There has never been a default in the United States. But this time the risk is real, Yellen warned.
In a matter of days, millions of Americans could lose their income. And the state will lose the highest credit rating, which means an absolute degree of confidence in the national economy and allows the government to borrow at low rates. If the rating is downgraded, borrowing will rise sharply. This will cost billions not only for the federal government, but also for private companies.
An increase in loan and mortgage rates, and a shortage of cash are inevitable. Unemployment will increase, social benefits will be cut. This will undermine the recovery from the pandemic, and an economic crisis will begin.
The US default scenario is still viewed by analysts as the end of the world. No one believes it will get to the worst. However, just talking about it can sow panic in the markets.
For example, in 2011, due to the refusal of the House of Representatives to raise the borrowing ceiling and the threat of default, the international rating agency Standard & Poor’s downgraded the sovereign credit rating of the United States – for the first time in history. This was followed by a stock market crash: the S&P 500 index fell for five days in a row – until lawmakers made a deal.