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The United States has reached their limit of national debt to 106.7% of its GDP, as in relation to the size of the economy. The parties in US Congress have been at loggerheads over debt ceiling negotiations. The Republican Party will agree to raise the debt ceiling only if the Democratic Party (US Government) does steep spending cuts. The US Treasury has given a deadline by June 1, beyond which the major economy will completely default and will struggle to pay off its debts.
European, and Asian markets exhibit cautious optimism ahead of deals and even sees odds that the Treasury exhausts its funds entirely. Goldman Sachs estimates that the Treasury has around $160 bn in room under the limit as of May, 17 out of which $85bn is likely to be spent through June, 1 while cash reserves are likely to drop below $30 bn by June, 8. There are high hopes that the treasury would eventually make out of this deal.
If the US does not negotiate a new debt ceiling, there could be credit downgrade, and spark higher interest rates. There would be cuts in social spending, and world markets would turn away from the dollar as a safe haven and would prefer their own currencies or gold for trade. A prolonged violation of the debt ceiling could cut 6-8 million jobs across the US, reduce GDP by 4-5%, and raise borrowing costs for households and businesses under a high interest rate scenario. This would undoubtedly undermine consumer confidence, diminish US banks’ balance-sheets with bond yields rising even higher, and set off recession not just in the US but across the globe.
Macro Indicators for FY 2023 –
| Indicators | India | US | Euro Area |
| Inflation | 4.7% | 4.9% | 7.0% |
| Interest Rate | 6.5% | 5.3% | 3.8% |
| Unemployment rate | 7.8% | 3.4% | 6.5% |
In the US, the unemployment rate has fallen from 3.5% to 3.4%. Wages growth stood at 7.04% in Mar’ 2023 vs 7.25% in Feb’ 2023. Non-farm payrolls stood at 2, 53,000 in Apr’23 vs 1, 65,000 in Mar’23. The labour market has been showing strength so far, inhibiting the US government to confidently pause the rising interest rates. However, US inflation has fallen below interest rates.
DOWJONES index is showing strength by trading near 52 week highs. NASDAQ (IXIC) technology index is trading near a 52 week high, showing robustness.
Bond Yield has slightly fallen to 3.67% as the US tightening credit norms have paused, ahead of the US banking crisis. This may lead to flight of capital to emerging economies.
The US Dollar Index has fallen to 103.22 in a week and exhibits that the dollar is weakening in relation to a basket of important world currencies.
Debt Ceiling –
Debt ceiling is the amount of money that the US government can borrow to fund its operations and pay its obligations. Whenever the debt limit is reached, the government has to take extraordinary measures like spending cuts, or increasing revenues to avoid any default on interest payments especially that are due on Treasury securities.
Debt ceiling was first introduced in 1917. The US Congress sets absolute limits for debt. The ruling government seeks for approval through votes from the opposition party to increase the ceiling for debt. Since 1960, the debt ceiling has been raised 78 times. The debt had shot up to 98.2% in FY 2020 prompted by the Covid 19 pandemic associated multiple relief acts and then continued to breach debt limit. It is expected to rise further by 2030 to 109%.
Due to the Covid pandemic in 2020, the economies all over the world had adopted expansionary policies to tackle the health crisis. The US had extraordinarily released the liquidity in the market through quantitative easing measures, and printed dollars thereby leaving loads of money in the hands of people to spend more than what they needed. Excessive spending led to high inflation, and bloated US’ debt to GDP ratio.
In 2010, S&P had downgraded the US government’s credit rating from AAA to AA+ when its debt to GDP ratio stood at 92%. In FY 2023, it has breached up to 107% while India continues to have lower premium grade with better debt to GDP ratio in FY 2023.
| Indicators | India | US | EU | UK | Japan | S. Korea |
| Debt to GDP Ratio | 69.6% | 107% | 93.10% | 80.7% | 266% | 53% |
| Credit Rating (S&P) | BBB- | AA+ | AA | AA | A+ | AA |
Isn’t it important for the government to tighten unnecessary/miscellaneous spending? How long will the fiscal imprudence go on and keep threatening the world of its cascading impact?
This indefinite rise of debt spells financial trouble for all the emerging economies through lower trade flows and would trigger extreme volatility in the markets. The US dollar hegemony has to end and the countries must find an alternative to the dollar and that’s widely acceptable.
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