【Japan Himalaya League】 Author: BeiJi (北极) Translator: Ranting

Republican Senate Leader Mitch McConnell expressed support for freezing the debt ceiling until Dec. 3 on Oct. 7, easing the U.S. government shutdown and national debt default, but still not completely resolving the debt ceiling issue. Congress will also face a series of bipartisan negotiations before the next debt ceiling is hit on Dec. 3.

According to multiple sources, the U.S. federal debt is $28.4 trillion as of August 2021. The debt ceiling is primarily used to repay ongoing obligations for past expenditures already incurred (such as debt service on the national debt), so failure to resolve it in a timely manner would mean default on existing debt, which has largely not happened in U.S. history, and therefore has a much greater impact than the government shutdowns that are a common occurrence.

A webmaster introduced the debt ceiling with a simple example: for example, my debt ceiling is $1,000, and you give me a loan of $500 promising to return it in 1 week, and failure to pay is a default. But 1 week later cannot be paid back, I will find a friend to borrow another 500 (at this time a total of 1000, is the cap of 1000) to pay off the debt, that is, new debt against old debt.

But the problem is, I am now short of money again, and borrowed 500 for my own use (not to cover old debts). When the time comes to pay off the debt, you can only raise the debt limit to 2,000 because the limit is 1,000 so you can’t go back and borrow 1,000 to pay off the previous 1,000.

Since the debt ceiling went back into effect on August 1, the Treasury has used a series of unconventional measures, including technical adjustments to create additional borrowing capacity and drawing on Treasury cash account balances. The Treasury is now expected to run out of cash on Oct. 18 and will not be able to keep the government running. The crisis was prolonged again when Republican Senate Leader Mitch McConnell expressed support for a brief debt ceiling freeze until December 3 on the 7th.

(Picture Source: Internet.)

Some users analyzed that once the U.S. debt default, even if it is only a technical default, the shock to the financial markets will be incalculable. Without raising the borrowing limit, the U.S. government is expected to cut spending and raise taxes by a total of nearly $1.3 trillion per year, an almost impossible task. And if the government drastically cut spending and increase taxes, and may make the pace of economic recovery is still unstable hit again, especially the already high unemployment rate will add insult to injury, so this is the U.S. government is never likely to take the option.

But another consequence of not raising the debt ceiling would be even more dangerous: the world’s largest economy would be unable to repay bond principal and interest, and the United States would have a sovereign debt crisis, which could seriously affect the dollar’s reserve currency status, throwing global financial markets into chaos and causing a heavy impact on the global financial system.

Netizens say the solution is either to continue the freeze (no cap but a time frame) or to raise the debt ceiling (a cap but no time frame). Simply put, by raising the debt ceiling, it also means raising the maximum amount of money that can be borrowed. A debt ceiling freeze, on the other hand, is equivalent to a limit that is null and void and allows for continued unlimited borrowing to pay off new debt until the freeze ends. Ultimately it’s all about borrowing new to pay off old.

What is certain is that this approach will not solve the fundamental problem and is overdrawing the credit of the country, the credit of the dollar.

Post Script: This article only represents the view of the author.

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Posted by: Ranting