Default Is a Delicate Matter
Published in Izvestia
(Russia) on 10 July 2019
by Sergei Drozdov (link to original)
Finance analyst Sergei Drozdov on America’s potential bankruptcy in September
During the first half of September, the day may come when the U.S. government will not be in a position to pay its debt in full and on time. This is the conclusion drawn by experts from the Washington-based nonprofit Bipartisan Policy Center. The risk of default may increase if federal revenues decrease as a result of tax revenues being lower than expected.
On the whole, as the Bipartisan Policy Center’s release notes, the growth of U.S. federal revenues for 2019 was “sluggish” and amounted to less than 3%. (It was expected to be 6%.) The lower corporate income tax rates were apparently connected to a decrease in tax rates in 2017. Let’s examine whether the U.S. really could become bankrupt in just a few months.
The issue of the U.S. default is not new and in recent decades has been much discussed in the international media almost every year. However, if we take a look at some historical examples, we can see that the U.S., one way or another, has successfully dealt with similar crisis situations throughout its entire history. In President George Washington’s time, the government restructured the national debt, which came about as a result of the War of Independence, by issuing federal bonds. Subsequently, securities were offered for redemption at 1% of their nominal value.
In 1917, to finance the expenses incurred as a result of the country’s participation in World War I, the American government issued military bonds, payable in gold. However, during the Great Depression in the 1930s, Congress refused to pay the holders of these documents in precious metals, which led to the decline of American currency almost twice against the British pound, the German mark and the French franc.
In modern history, the threat of an overseas default became acute in 2013. Due to clashes over the budget at that time, government agencies shut down for two weeks, and government employees went without pay. Nevertheless, the government managed to avoid a crisis by adopting a law allowing it to raise the national debt level. However, despite these efforts, another government shutdown took place under President Donald Trump in January 2019.
In recent years, raising the American national debt level has become the subject of active bargaining between the majority party and the opposition in Congress, and has increasingly become a farce. By aggravating the situation and speculating about the threat of bankruptcy, the politicians are trying to gain certain advantages and earn political points for themselves.
And yet, the global community is becoming increasingly concerned about America’s ballooning debt. It is creating risks for the stability of the American dollar, which has long been part of the gold and foreign exchange reserves of the vast majority of countries.
Theoretically, there is, of course, a risk of default on U.S. debt. Many economists do not miss an opportunity to promulgate this possibility, but each time, Armageddon fails to take place. And it won’t happen this time either. While reducing the debt burden on business, the Trump administration is increasing its dependence on external sources of borrowing, which poses no problems due to a deficit in the number of quality borrowers in the global market.
The size of these loans is controlled by Congress, which is ultimately likely to approve another increase in the U.S. debt ceiling. And let me remind you, the ceiling is currently capped at $22 trillion.
During the first half of September, the day may come when the U.S. government will not be in a position to pay its debt in full and on time. This is the conclusion drawn by experts from the Washington-based nonprofit Bipartisan Policy Center. The risk of default may increase if federal revenues decrease as a result of tax revenues being lower than expected.
On the whole, as the Bipartisan Policy Center’s release notes, the growth of U.S. federal revenues for 2019 was “sluggish” and amounted to less than 3%. (It was expected to be 6%.) The lower corporate income tax rates were apparently connected to a decrease in tax rates in 2017. Let’s examine whether the U.S. really could become bankrupt in just a few months.
The issue of the U.S. default is not new and in recent decades has been much discussed in the international media almost every year. However, if we take a look at some historical examples, we can see that the U.S., one way or another, has successfully dealt with similar crisis situations throughout its entire history. In President George Washington’s time, the government restructured the national debt, which came about as a result of the War of Independence, by issuing federal bonds. Subsequently, securities were offered for redemption at 1% of their nominal value.
In 1917, to finance the expenses incurred as a result of the country’s participation in World War I, the American government issued military bonds, payable in gold. However, during the Great Depression in the 1930s, Congress refused to pay the holders of these documents in precious metals, which led to the decline of American currency almost twice against the British pound, the German mark and the French franc.
In modern history, the threat of an overseas default became acute in 2013. Due to clashes over the budget at that time, government agencies shut down for two weeks, and government employees went without pay. Nevertheless, the government managed to avoid a crisis by adopting a law allowing it to raise the national debt level. However, despite these efforts, another government shutdown took place under President Donald Trump in January 2019.
In recent years, raising the American national debt level has become the subject of active bargaining between the majority party and the opposition in Congress, and has increasingly become a farce. By aggravating the situation and speculating about the threat of bankruptcy, the politicians are trying to gain certain advantages and earn political points for themselves.
And yet, the global community is becoming increasingly concerned about America’s ballooning debt. It is creating risks for the stability of the American dollar, which has long been part of the gold and foreign exchange reserves of the vast majority of countries.
Theoretically, there is, of course, a risk of default on U.S. debt. Many economists do not miss an opportunity to promulgate this possibility, but each time, Armageddon fails to take place. And it won’t happen this time either. While reducing the debt burden on business, the Trump administration is increasing its dependence on external sources of borrowing, which poses no problems due to a deficit in the number of quality borrowers in the global market.
The size of these loans is controlled by Congress, which is ultimately likely to approve another increase in the U.S. debt ceiling. And let me remind you, the ceiling is currently capped at $22 trillion.
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