The United States may default for the first time in history

You we It may default for the first time in history if the debt limit is not raised by June 1. Democratic and Republican lawmakers disagree on the requirements for raising the spending cap instead Specific date provided by the US Department of the Treasury, Janet Yellencome closer.

United States government You have reached the loan limit $31.4 trillion on January 19, 2023, forcing Yellen to make the decision “extraordinary measures” To avoid a historical stumble, Such as the temporary withdrawal of investments in pension and social security funds.

The Treasury Secretary had already announced on January 13 that the measures would be taken. On the same day, I sent a letter to the Republican Speaker of the House Kevin McCarthyAsking approval to increase so that the government “Fulfill your obligations for a limited period of time”. Here it is full From the document (202 KB, in English).

Since the 1960s, the United States has had more spending cap 78 times. Of those, 49 times have been under Republican presidents and 29 times under Democratic presidents.

The cap – established in 1917 – serves to rein in spending that Congress and the White House have already approved.

The debt limit is the total amount of money that the government is allowed to borrow—by selling U.S. Treasury securities—to meet its obligations, such as paying Social Security benefits, Medicare, military salaries, interest on the national debt, and tax refunds.

Kevin McCarthy trot out on April 19 to raise the debt limit by $1.5 trillion. The Republican bill proposes cuts Federal budget submitted by Biden. The text also proposes limiting public spending growth to 1% in the next decade.

The bill passed the House of Representatives on April 26 by 217 votes. The party opposing the Biden government holds the majority of seats in the US House of Representatives. There are 222 Republicans and 213 Democrats.

The motion will now pass through the Senate, where it will meet resistance. Although the Democratic Party does not have half of the Senate, the seats of independents (2) and the vote of Democratic Vice President Kamala Harris count for votes.

Even if the Senate passes it, Biden has already said he would veto McCarthy’s bill. The Democrat wants Congress to approve an increase in the debt limit without changing the way the increase is determined from public spending.

In a conversation with reporters on Thursday (May 11), McCarthy said, apparently, Biden “You don’t want a deal.”

The statement came after former US President Donald Trump asked, on Wednesday (May 10), Republicans in Congress not to agree to increase the debt limit and allow the US to default, unless the Democrats agree to the cuts. “particle” in spending.

Biden’s proposed budget cuts will make it more difficult for the Democrat, who would fail to comply with the proposals, to be re-elected. –As a greater investment in social programmes–That would boost her popularity before the 2024 elections.

In an interview with The power is 360The economist and specialist in financial markets Cesare Bergo explains that if the United States does not raise the ceiling, the damage to the economy will not be limited to the country alone. According to him, the financial structure of US creditor countries, such as China and the United Kingdom, will be severely affected.

“when you don’t get it [dinheiro] that you got, as a result of this capital reward [investido]And You end up changing plans. However, it’s all planning [financeiro dos países] get hurtsaid the economist.

According to the expert, the Brazilian economy will also suffer. Brazil has about 214 billion US dollars Invested in US Treasury bonds – The 13th largest holder of US debt. With a possible default, the country may lose the entire amount.

Currently, Bergo explains, US Treasury bonds are one of the safest treasuries in the world to invest in. However, a possible default may turn away foreign investors, creating a general crisis in the country, and thus in the world.

Spending ceiling x public debt

Almost every year, the United States spends more than it collects in taxes, creating a file Fiscal deficit. To make up the difference and be able to pay the bills, the government borrows money, which accumulates over time, resulting in a bankruptcy religion.

This debt began to grow exponentially in the 1980’s after then-President Ronald Reagan passed tax cuts. Tax revenues fell and the government had to borrow more money to spend.

In 2000, after the speculative bubble on the Internet burst, the United States slid into recession, and in 2001 and 2003 President George W. Bush cut taxes twice as much, increasing the country’s debt.

With the crisis of 2008, the unemployment rate reached 10%. The government had to increase spending to prevent banks from collapsing completely and to increase coverage of social services. For this, more loans were needed.

In 2017, former President Donald Trump approved a major tax cut. During his administration, the US debt increased by $7.8 trillion.

As revenues fell and spending increased, the government had to raise the debt ceiling several times in a row in order to meet its financial obligations.

Cesare Bergo explains that in order for the United States to be able to reduce its debt and avoid continued increases in the spending ceiling, it is “It is imperative that economic growth be greater than debt growth.” DrIn this way, it will not be necessary to sell US Treasury bonds to cover the budget deficit.

What Most contributes to the high US debt These are the so-called mandatory expenditures – expenses that do not need to be approved by Congress each year in order to be paid – and which take up 60% of the budget. Another 30% is used for discretionary spending – which must be approved annually – such as defense money.

The Federal Reserve (Federal Reserve, the central bank of the United States) raised interest rates for the tenth consecutive time in May – Highest level since June 2006 – to try to contain inflation. According to the economist, high interest rates, combined with tight monetary policy, reduce the purchasing power of the population, causing the government to collect lower taxes, thus increasing the debt limit to cover the deficit.

Currently, the public debt of the United States tied 98% of the country’s gross domestic product. The number corresponds to $94,182 per American. Projections indicate that within 10 years the deficit will rise to 110%.

This report was prepared by journalist trainee Eduarda Teixeira under the supervision of Assistant Editor Lorenzo Santiago.