The US Debt Limit Crisis: What are its possible implications for the economy?
Just 6 months on from the first Debt Limit Crisis at the end 0f 2022, the US could be forced to raise its Debt Limit yet again in 2023 as the country is hampered with many issues throughout this year. From feeling the after-effects of its Tapering Regulation to a possible banking crisis, it seems like trouble will continue to pile up on US financials at the beginning of 2023. So what is currently happening with the US economy? What are the possible effects that might occur if the Debt Ceiling is raised again?
The Sting of An Expanding Money Supply….
The first semester of 2023 has not gone by and we are already back talking about the U.S. economy facing a crisis on its own. From feeling the after-effects of the enormous stimulus check to an era of De Dollarization, it seems like all headlines are on the U.S. economy ever since the end of 2022 and all of them are not good news. All of this could go even worse if the decision regarding the debt limit or debt ceiling crisis is not managed properly.
Throughout 4 years of the Pandemic Era, the US M2 Money supply has grown by more than 30% from $15 Trillion to $20.8 Trillion at the time of writing. Pair that with a record-high inflation rate at the end of 2022 and a banking collapse at the beginning of 2023, it is fair to see why there are plenty of concerns pointed at the US Economy. While the decision currently on the debt ceiling has stalled, it could make or break the impression of the outside world on the US economy.
So what is a Debt Ceiling exactly? In our previous medium article titled “Could the Rise in Debt Ceiling Be a Catalyst for the Crypto Market?” We have highlighted this topic of Debt Ceiling so do make sure to check it out. In short Debt Ceiling is a ceiling imposed by Congress to limit the total accumulated debt carried out by the US Government over all kinds of instruments. This was meant to be an effective solution but unfortunately as mentioned before the US Economy has been operating at an average deficit of $1 Trillion every year since 2001 meaning it spends more than the revenue it generates from taxes and other sources.
Why does this matter you may ask? It matters because the US Economy and the US Dollar act as the world reserve so the situation happening within the country will also reflect on the global economy. We see this in the 2001 Dot Com Bubble and 2008 Great Depression where market collapse that originated in the US quickly spread around to other countries. So whatever happens next with the Debt Ceiling talks will quickly be watched not only by US Citizens but also by the world.
As of right now the debt ceiling mark still stands at $31.4 Trillion which was signed by President Joe Biden at the end of 2021 but unfortunately, this limit has been passed in October 2022 due to the measures implemented by the FED to counteract the record high inflation. The National Debt has stayed above the Debt Ceiling throughout 2023 and if it is not lifted by June of 2023, the US Economy could default on some of its debt.
Can the US Economy really default on its debt? There have been no instances before where defaults happen and currently the conversation seems to point out that the US will not default on its debts. If it does happen the consequences are catastrophic as treasury bondholders will want to increase the interest rate with the added risk and government aid or spending could be halted as the country operates to meet its debtors with the revenue generated.
Retirement Funds and Social security could also be due on payments while the uncertainty in the country could spread to other investment instruments such as the stock market. The go-to option will be to raise the debt ceiling again for the 50th time since it was imposed in 1917. This Ceiling was meant to prevent the US Economy from going into deficit over a long period and hope that the debt could generate more revenue in return.
The National Debt currently stands at more than 122% of the US GDP and credit analysis firm Moody’s Analytics predicts that a four-month default would hurt the GDP further by about 4%. Stock prices could also falter by a third from their current figures and would also result in unemployment of more than six million jobs. The analysis also reveals that a default on the US Treasury Bonds, of which more than half are currently owned by Japan and China, could lead to a similar downturn as the 2007–2009 Great Recession.
This is why the current discussion of the Debt Limit crisis is a major headline for everybody as the impact would be felt by the global world. The Debt Limit will probably be further increased as before but again it is not a solution for the problem that is to come but a temporary band-aid to ease the current situation. We will have to wait and see if a middle ground can be found from the ongoing talks within the congress.
Extending the Debt Limit will increase the already grown money supply that is circulating in the economy while failure to increase it, will also result in catastrophe for the global economy. The Debt Limit Crisis that is faced by the world is the after-effects of the Pandemic Era that brought the whole world to a halt. The question with expanding the money supply or the national debt is, what are its possible implications for the world?
Possible Implication of the Debt Ceiling Increase
Just like the quote stated by the former President of the United States Herbert Hoover “Blessed are the young for they shall inherit the National Debt,” it pretty much sums up its implications. The National Debt that has accumulated so far will have to be paid by the people through taxes or other measures and accumulating more debt means bad for them. Taxes could also be lifted alongside the increase in Debt Ceiling to compensate for the difference.
As mentioned before, as people’s eyes are on the US Economy currently, a raise in the debt ceiling will also put a bad impression on the outside world. One example of this is possibly sounded out by countries from the BRICS alliance who are seeking to reduce their dependence on the US Dollar. Less usage of the US Dollar from the outside world could essentially destroy its value over time as the money supply is expanding due to the increase in National Debt.
Of course, not all implications are always bad as the increase in debt ceiling provides an opportunity for the US Economy a breathing room to operate and possibly generate more revenue in the future. We can take the growing DeFI Space where most of its hubs are situated in the USA so these increases could be used to support great projects from the space that could grow in value over the long run. This is also why it is critical for the USA to get its Crypto Bill right and rolled out as quickly as possible.
All in All, a Debt Ceiling increase is a powerful last resort that needs to be maximized efficiently to steer the economy back on the right track. It has tremendous implications both good and bad but should not be used frequently as an economy should be able to sustainably generate revenue over the long run. Whatever the decision may be taken from Congress, we as individuals should also be able to pick an asset/investment/skill that will provide sustainable support for you and your loved ones. The question is what is your financial support right now? Let us know in the comments below!
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