MLO: The Second US Debt Crisis?
In recent days, it is easy to find articles regarding US debt pricing issues on various presses. What is going on? Why do people so much interested in that?
At the end of this presentation, you will get it.
Now, the US debt is approximately $31.4 tr and already hit its limit. So now, they have to decide to pay back that debt. But who the government owed to?
The US debt consists of intragovernmental and public debt, and you can see that more than 3/4 of the debt is owed to the public through selling their securities like bonds. It means that the government has to pay back the money owed to the public. As you saw in the previous picture, the main source of government revenue is tax.
So if we look into a case study of Omnibus Budget Reconciliation (Aug, 1993) during Clinton Administration, they had to raise the tax to secure enough money to pay off the public. But this method can deter economic growth as a trade-off. So it is a controversial approach depending on the political favour.
However, the government actually have another option; just raise its limit. Historically, the US revised the debt ceiling 76 times. So raising its debt is not a big deal itself. Then, that’s the point?
Well, people now say current debt issues as a ‘debt ceiling crisis.’ It refers that they have a kind of concern. I looked around the various data and found this one, the 5y Credit Default Swap. It shows that people worry about the default of the United States. In fact, we all know that the US won’t collapse because of the ‘debt ceiling’ but what people worry about is their credit and further damage to the finance field. Yet, you might recognise the other spike in around 2008. This is when the first US debt crisis occurred.
There is a similar event during Obama’s presidency. In Aug of 2011, the administration faced its debt cut and tried to raise it. However, they already had spent a huge amount of money to brisk the economy, trying to escape from the slump of the Great Recession. On top of that, the Congress was controlled by Republicans, so they confronted regarding higher debt limit. The final decision was delayed, and it was too late. Their national credit was dropped from ‘triple A’ to ‘AA+.’
In a word, it was a tragic result of a dare chicken game amongst politicians.
Now in 2023, the US government spend tremendous money to stabilise the economy due to the Great Lockdown, and Congress is also in the Republicans’ hand, wanting a cut in taxes and government spending. Everything going exactly the same as that back in 2011. And that’s why people so much keep their eyes and ears on the US debt ceiling.
