Business as Usual*

*Editor’s note: On March 4, 2022, Russia enacted a law that criminalizes public opposition to, or independent news reporting about, the war in Ukraine. The law makes it a crime to call the war a “war” rather than a “special military operation” on social media or in a news article or broadcast. The law is understood to penalize any language that “discredits” Russia’s use of its military in Ukraine, calls for sanctions or protests Russia’s invasion of Ukraine. It punishes anyone found to spread “false information” about the invasion with up to 15 years in prison.

Analyst Natalia Milchakova on whether the U.S. national debt ceiling will be raised and the possibility of a default.

The U.S. Treasury warns of the looming threat of default, with Treasury Secretary Janet Yellen recently urging Congress to raise the national debt ceiling. Otherwise, an “economic and financial catastrophe” awaits the U.S. and the entire world. So, are we really on the verge of a new global recession?

As a reminder, at the beginning of this year, the U.S. national debt hit the ceiling of $31.4 trillion established by Congress. Over the past 10 years, the U.S. national debt has doubled, and over the past 32 years, it has increased tenfold. Congress has raised the debt ceiling more than 75 times in the past 60 years.

However, today’s problem is that the Republicans will only allow another increase of the national debt ceiling on very strict terms. They propose to increase the limit by no more than $1.5 trillion and simultaneously demand cuts to public spending worth $4.5 trillion. However, U.S. President Joe Biden rejected those demands, opposing any Republican conditions. Because of both Democrats and Republicans’ tough stances, there’s a deadlock.

Therefore, from June 1, the U.S. government may stop paying its bills due to a lack of funding, and at least a technical default will occur due to the U.S.’ inability to repay interest on government bonds on time.

In the 21st century, similar disagreements between Congress and U.S. presidents have already occurred twice: in 2011, when Barack Obama was president, and in 2018, when Donald Trump took office. But in both cases, just a few days before a possible default, lawmakers agreed to raise the debt ceiling, avoiding the threat of an economic crisis.

The likelihood that Congress and President Biden will reach a compromise by June 1 seems relatively high. Nevertheless, the experts at Morgan Stanley Capital International Research Center note that at the beginning of the year, the probability of default on U.S. government bonds was estimated at less than 0.5%. By comparison, in early March, such a probability was higher, sitting at 2%. In other words, negative expectations have risen significantly over the course of less than six months.

Even though the global agencies are in no hurry to downgrade the U.S. government’s credit rating, apparently not considering the threat of default as serious, there is a certain probability, though a slight one, that lawmakers will not agree this time. The difference between today’s situation and those of 2011 and 2018 is that those were not pre-election years, meaning that Congress and the previous presidential administrations had a much greater window of opportunity to come to an agreement.

The situation is different now. Ahead of the upcoming 2024 presidential election, both Democrats and Republicans are trying to prove that they are right in the current conflict. And no one seems interested in giving in.

At the same time, the White House Council of Economic Advisers predicts that if the U.S. defaults this year, its economy will collapse by 6.1%, and unemployment will rise to 8.5%. But, of course, many countries have lived and continue to live in much worse economic conditions. For example, Russia’s gross domestic product fell by 9% during the 2008-2009 financial crisis. And unemployment in the EU was also at 8.5% only a few years ago, not to mention that in some EU countries, such as Spain, the figure still exceeds 11-12%. So even if the most pessimistic scenario ever were to occur, the U.S. economy has a good chance of surviving.

However, the real problem for the U.S. economy, in this case, will lie elsewhere. A default would lead to a crisis of confidence in the U.S. national debt and the overall financial system. The U.S. dollar would continue to lose the trust of exporters and importers worldwide, as well as that of stock speculators. The largest holders of U.S. government bonds — Japan, China and the U.K. — would start to sell them en masse, which could lead to a global debt market crisis.

However, the probability of the debt ceiling’s being raised and everything working out again this time is incomparably higher than the probability of an “apocalyptic” scenario. In all likelihood, U.S. lawmakers will compromise to maintain confidence in the U.S. as a reliable borrower. Thus, the debt ceiling will be raised, and the U.S. will likely continue to live in debt until it reaches the next limit.

The author is a lead analyst at Freedom Finance Global.

The author’s position may not necessarily reflect the views of Izvestia’s editorial board.