The United States is on the verge of bankruptcy. A disaster scenario deemed “very likely” by Janet Yellen, Secretary of the Treasury, which could happen as early as June 1. In order to prevent the country from running out of public money, Joe Biden and Kevin McCarthy, the leader of the opposition, met to negotiate to find a budget compromise.
Concretely, to remove this risk, it is necessary that the Congress – the Senate held by the Democrats and the House with a Republican majority – votes to raise the maximum ceiling of authorized public debt. The Republicans require, to give their green light, a sharp reduction in public spending. Joe Biden, who is campaigning for re-election in 2024 on a social justice pledge, opposes it. But what if the world’s leading economy was no longer able to pay?
For the Americans, this will be a disaster. “Any American who is directly or indirectly dependent on government payment will no longer be paid,” said Gregory Daco, chief economist for EY Parthenon. This would therefore concern the salaries and pensions of civil servants and soldiers, social benefits related to children, health care, low incomes, the elderly, etc.
The situation would be the same for companies working for the government: “They will no longer be paid either,” he adds. Because the Treasury risks “running out of cash to pay hundreds of billions of dollars” in bills, said Nancy Vanden Houten, economist for Oxford Economics.
Also, “if stock markets fall, […] people’s savings and retirement savings would be hurt,” said Nathan Sheets, chief economist for Citigroup Bank.
Already in 2011, the country had not gone far from default. Immediately, the markets reacted. The New York Stock Exchange had collapsed, with a fall in the S
What would change everything: the fact that the United States is unable to reimburse the holders of Treasury bonds, the king of investments in global finance.
“Will international investors decide to pull back and stop investing? asks Gregory Daco. Already, they have become “more reluctant to hold sovereign debt that matures in June,” Janet Yellen recently warned.
As for the dollar, it “would depreciate very sharply”, he further notes. However, the global financial system “depends on the stability of the dollar”, underlined the Center for american progress in a note of May 11.
But, as in 2011, gold could be the big winner: “It’s the safe haven”, because in the event of a threat of default, “the dollar will go down, bond yields will go down and stocks are falling,” warned Jack Ablin of Cresset Capital.
The equation is simple. If the government stops spending, households will do the same. And their consumption being the locomotive of the American economy, that would put a big brake on the machine. “The economic impact simply comes from the fact that the government stops spending,” summarizes Gregory Daco.
Lower government spending means “that the family, not getting their checks…will not be able to spend the same on going shopping, which…will affect the store they shop at.” races, which will then affect their own recruiting decisions…”
The cumulative financial and economic impacts could cost the US economy 5% of GDP, estimates Gregory Daco: “We are talking about a more significant shock than the contraction in GDP during the financial crisis. We are talking about a huge shock. »
The effects of a US economic crisis could of course spread globally. Especially since the interest rates of “bonds issued by the United States would rise very sharply”, with chain reactions: “fall in business and household investment, as well as consumption, and therefore a deep recession in the United States”, which could spread “in Europe and elsewhere”, anticipates Éric Dor.
But Nathan Sheets qualifies: “I don’t think global growth or US growth will be significantly affected this year. The situation could, paradoxically, benefit some U.S. exporting companies, as a depreciation of the dollar would “increase foreign demand for their products by effectively making them cheaper,” according to a May 2 Council on Foreign Relations memo.
