Friday, June 2, 2023

US debt ceiling threatens the dollar and will increase inflation

Ten days after the default, the debt ceiling in the US continues without any settlement. The Treasury must decide whether to pay the payrolls of executives and the health plans of millions of Americans or face a June maturity date.

The public body led by Janet Yellen has tried to fabricate accounts to buy time for talks between Democrats and Republicans. However, the White House can act without the need for a treaty, such as invoking the Fourth Clause of the 14th Amendment or imposing a new debt ceiling by decree, to alleviate the situation.

However, it would set a precedent for generations to come and open the way for a complete breakdown of the consensus if you decide to act unilaterally. It should be noted that there are presidential elections next year and the change of political complexion in the White House could lead to movements similar to Joe Biden.

Given the uncertainty and without a definite date for default to occur – in the US this is called ‘Day X’ –, investors are starting to do their own analysis of the consequences of a potential default. The dispute between ‘donkeys’ and ‘elephants’ can bring ‘devastation’ in the markets. According to Yellen, a fall could mean a 40% drop on Wall Street, while insurance against the risk of default on bonds (CDSs), the world’s most secured debt, has moved above 2011 debt crisis levels. and 2012.

USA, one step away from default

In those years, Barack Obama, the then President of the United States, had serious problems unlocking the debt ceiling and was downgraded a grade by the rating agencies, which took years to return to ‘Triple A’.

Investors are likely to view any default as the result of a tense political climate, not a fundamental US failure.

“Unless Congress reaches an agreement to raise the debt ceiling, the US is at risk of default within weeks,” said George Brown, an economist at Schroders. If the critical day arrives and no agreement is reached, the payment of the coupons and the repayment of the Treasury Bills will not take place. There is only one precedent in US history and it happened in 1979 due to a computer failure while processing a check. Then there was only delay in payment.

Day X will be when the Treasury will run out of sufficient funds to deal with the debt. It should be noted that the 2021 earnings campaign in the US was disappointing and that the 2022 earnings statement will largely depend on earnings growth through May. If this collection develops favourably, the government will have the leeway to wait till June with quarterly collections of VAT and other taxes. “There is a possibility that this may continue till July and August as well,” Brown said. However, if tax revenue falls short, the Treasury would have to declare a default.

Gold and yen remain safe havens ahead of debt defaults

Republicans have ironed out their differences and begun direct talks with the White House with one voice, while Joe Biden has turned his ear to the wolf and tried to straighten things out with Speaker of the House Kevin McCarthy. has cut short his Asian tour to of the representatives.

“Beyond the limited legislative period, – Brown warned – the main obstacle will be ultra-conservative Republicans, who can block it by removing the Speaker of the House to prevent the bills from being introduced.” However, in this case the core of the Democratic center will come to Biden’s rescue.

In fact, the country’s Supreme President has assured that he will activate the 14th Amendment, which establishes that the legality of the US public debt “shall not be called into question.” However, the movement could be appealed and knocked out in the Supreme Court, which would lead to even more turmoil in the market.

For Brown, the possibility of default exists and hence this scenario cannot be ruled out. He conceded, “Investors are likely to view any default as the result of a tense political climate, not a fundamental US failure.” However, investors are taking positions to cover their portfolios, especially with the collapse of bank deposits and the bankruptcy of financial institutions.

Protect portfolio in case of loan default

Brown focuses on investment based on waiting for the debt ceiling to be resolved, but prepares a plan B in case the talks fail. In this sense, it has advocated keeping liquidity and investment diversification to protect itself from the high volatility that can be expected.

In this sense, he expects the yen and the Swiss franc, the two currencies with the highest safe-haven value in the market, to outperform the dollar. In this case, the fall of the greenback would mean a new surge of galloping inflation and even a possible scenario of hyperinflation if the US defaulted as feared. Raw materials, such as gold and oil, would skyrocket in price, the former due to its safe haven status and the latter due to its inverse link to the dollar.

All this, with a recession in the near future and a very sharp drop in prices. One of the keys is found in the most secured European loans. German bonds would receive a higher volume of investment and therefore country risk on the periphery of the eurozone, such as Spain, Greece, Italy or Portugal, could be severely affected, making future issues more expensive, which are already high. Are. Interest rates continue to rise. It should be remembered that the price of the euro and the dollar have not yet met interest rate hikes by the European Central Bank and the US Federal Reserve, respectively.

The recession in the US may deepen in September this year and may occur earlier than anticipated. And that is, most business activity in the US depends largely on public spending. Biden has a plan to reindustrialize America worth a trillion dollars, with Spanish companies betting on it. For this reason, Brown bets on defensive investments such as the health sector, laboratories and pharmaceuticals.

Nation World News Desk
Nation World News Desk
Nation World News is the fastest emerging news website covering all the latest news, world’s top stories, science news entertainment sports cricket’s latest discoveries, new technology gadgets, politics news, and more.
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