Xinhua News Agency, Washington, October 8th (International Observation) U.S. debt “bomb” fuse is difficult to dismantle, political malpractice threatens the world
Xinhua News Agency reporter Gao Pan Xiong Maoling Xu Yuan
The U.S. Senate recently passed a bill to raise the federal government’s debt ceiling for a short period of time to temporarily avoid the risk of defaulting on government debt. However, this expedient measure did not really resolve the differences between the Democratic and Republican parties on the debt issue, and only delayed the debt ceiling crisis until December. U.S. politicians frequently staged such “farce”, reflecting the political abuses of the U.S. political polarization and the failure of the governance system. Its spillover risks will spread to the world and threaten the recovery of the world economy and the stability of the global financial market.
U.S. debt ceiling crisis postponed
According to a short-term bill passed by the U.S. Senate on the 7th, Congress will temporarily raise the federal government’s debt ceiling by approximately $480 billion to ensure that the U.S. Treasury Department can fulfill its payment obligations until December 3. House Majority Leader Steny Hoyer said that the House of Representatives will vote to pass the bill next week. The White House stated that President Biden looks forward to signing the bill as soon as possible.
This “stoppable measure” has not really eliminated the root cause of the stalemate between the two parties. In consideration of factors such as next year’s congressional elections, the Democrats hope to raise the debt ceiling with the Republicans through regular procedure legislation and are unwilling to bear the political pressure of increasing government debt alone. But Senate Republican leader McConnell sent a letter to Biden on the 8th, clearly stating that the Republican Party will not help the Democrats to raise the debt ceiling again in the future. The Democrats can only use the budget adjustment process to solve the debt ceiling problem alone. It is foreseeable that the two parties may also be fighting over the debt ceiling in December, and the risk of the federal government’s debt default will rise again.
The so-called debt ceiling is the maximum amount of debt set by the U.S. Congress for the federal government to fulfill the payment obligations that have been incurred. In layman’s terms, it can be understood as the “credit card limit” of the U.S. Department of the Treasury. Within the debt ceiling, the Ministry of Finance can control the pace of issuance of bonds on its own; after reaching the ceiling, the Ministry of Finance needs to increase the “credit card limit” or temporarily abolish the “credit card limit” before it can continue to issue bonds.
This mechanism is designed to regularly review the state of government expenditures, but things have changed with time, and it has been difficult to achieve the original intention of strengthening fiscal discipline and controlling debt growth. Data from the Federal Budget Accountability Committee show that in the 1980s, the US debt ceiling was less than $3 trillion, and now the debt scale has exceeded the $28 trillion mark.
Chen Fengying, a researcher at the China Institute of Modern International Relations, told Xinhua News Agency that at present, it has only postponed and has not fundamentally resolved the US debt ceiling. The US debt problem is a structural problem, which has existed since the subprime debt crisis. If the U.S. economy achieves high growth, the debt problem may be alleviated, but the high growth of the U.S. economy is unsustainable, the U.S. debt problem has become the norm, and factors such as the new crown epidemic have exacerbated the U.S. debt dilemma. The U.S. economy is highly indebted and cannot be eradicated like a snowball.
Political malpractice risks spill over the world
In recent years, the debt ceiling has increasingly become an important bargaining chip in the political game between the two parties in Congress. Almost every few years, the two parties have to stage a political “farce” that stirs the nerves of the global market. Individual politicians even push the United States to the “edge of the cliff” of debt default at any cost to gain political capital. Senator Martin Heinrich of New Mexico, the Democratic Party of the United States, said that it is no longer possible to describe in words how absurd the debt ceiling is reduced to a tool of partisanship.
Although the two parties often reach an agreement before the deadline for debt default, the frequent occurrence of debt ceiling crises reflects the serious drawbacks of the US political polarization, the difficulty of obtaining social consensus, the failure of the governance system, and the political credit overdraft. This has not only become an important source of risk for US economic growth and capital market volatility, its spillover effects have also spread to the world through US debt, US dollars and financial markets, threatening world economic recovery and global financial market stability.
The debt ceiling default crisis in August 2011 was the US’s closest to a “technical” default. It caused violent capital market volatility and led to the first sovereign credit downgrade in US history. At that time, US short-term Treasury bonds were sold off and interest rates soared, the US stock market experienced a sharp correction, consumer confidence was frustrated, and economic growth was dragged down. Emerging markets and developing countries are also forced to pay higher interest rates for their US dollar-denominated bonds.
If the consequences of a real default on U.S. debt are more serious, economists generally believe that it will cause an “economic disaster.” U.S. Treasury Secretary Yellen warned that the default of U.S. debt may trigger a surge in interest rates, a sharp drop in stock prices and other financial turmoil, and the U.S. economy will return to recession.
Cecilia Routh, chairman of the White House Council of Economic Advisers, pointed out that the current global economy has not yet fully recovered from the new crown epidemic. Once the US debt default triggers a global financial crisis, it may be worse than the 2008 international financial crisis.
In the long run, the U.S. debt ceiling crisis will also severely overdraft U.S. political credit, weaken the credibility of U.S. Treasury bonds and the status of the U.S. dollar as a reserve currency. U.S. think tank Brookings Institution consultant Amadou West said that this provides more reasons for the BRICS and African countries to request governance reforms of international financial institutions such as the International Monetary Fund and the World Bank. Some economies will also consider promoting the diversification of foreign exchange reserve assets and gradually reduce their dependence on US Treasuries.
Chen Fengying believes that the U.S. two parties rely on the hegemony of the U.S. dollar, and there is little international coordination and communication when formulating policies. The uncertainty of the U.S. debt crisis will affect the U.S. bond market, the stock market, the property market, and the exchange rate fluctuations of the U.S. dollar, which will then be transmitted to the global market and increase. Risks and volatility in multiple areas such as global investment and trade are not conducive to the recovery of the world economy.
She said that for the challenges caused by the U.S. debt crisis, countries should continue to follow the direction of the U.S. economy and policies, optimize investment portfolios and foreign exchange reserves in a timely manner, and resist risks as much as possible. In addition, international macro-policy coordination is also very important. When major economies undergo major adjustments in their macro-policies, they should be coordinated and notified frequently. In particular, the transparency of U.S. policies needs to be further improved, and decision-making should be more responsible. (Participating reporter: Fu Yunwei) (End)
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