The BBC looks at three ways global population could be affected if the US fails to reach a deal on the country’s debt.
The US government is currently embroiled in a dispute that could prove to be one of the costliest in history.
If Democrats and Republicans don’t agree to allow the US government to borrow more — or, to use fiscal jargon, raise the debt ceiling — the world’s largest economy will go bust on its $100 debt. 31.4 million, trillion.
They must reach an agreement by June 1, a date known as “Day X”.
In exchange for support for raising the debt ceiling, Republicans are demanding $4.5 trillion in budget cuts, which would thwart several priorities on President Joe Biden’s agenda.
The White House called the Republican request “a blueprint to devastate working American families,” though it has signaled in recent days that it could make some budgetary concessions.
Both Biden and House Speaker Kevin McCarthy are under pressure from the wings of their respective parties not to budge. With a narrow Democratic majority in the Senate, just one seat away, and an equally tight Republican grip on the House of Representatives, reaching a deal has so far proved tricky.
Biden said during the G7 summit in Japan that he plans to speak with McCarthy this Sunday (5/21) to try new negotiations. The day before, McCarthy had told reporters that he did not expect any progress in the dialogue until Biden returned from Japan.
If there is no agreement, the impact would be “devastating” not only in the US but in the rest of the world, according to the British finance minister, Jeremy Hunt.
“It would be absolutely devastating if the United States, one of the biggest engines of the global economy, saw its GDP (Gross Domestic Product) derailed by the absence of a deal,” he said, including during the G7.
In practice, what would that mean for the economy and for you?
The economy
First, let’s establish one thing: every expert the BBC has spoken to thinks the US will not default on its debt.
However, if that happens, “the global financial crisis [de 2008] it would seem like just a small party” by comparison, says Simon French, chief economist at investment bank Panmure Gordon.
If the US doesn’t raise its debt ceiling, it won’t be able to borrow more money and will quickly run out of money to pay its obligations.
“The government would stop giving out welfare and support payments to people, which would affect their ability to consume and pay their bills,” says Russ Mould, chief investment officer at AJ Bell. “So it would affect the economy.”
The White House Council of Economic Advisers estimates that if the administration fails to reach a debt ceiling agreement for an extended period, the US economy could contract by up to 6.1%.
Economist Mohamed El-Erian, president of Queens’ College, University of Cambridge, says a default “would probably send the United States into a recession”.
This would have huge effects on the rest of the world.
“The United States is one of the world’s largest trading partners. [Nesse cenário de calote] They would buy less products from the rest of the world,” he says.
El-Erian doesn’t think a recession in the US would lead to an economic slowdown in other countries. The Frenchman is “100% convinced” that it would happen.
prices would skyrocket
The US dollar is the world reserve currency.
A huge list of goods major items such as oil and grain are priced in dollars.
If the US government defaults on its debt, the value of the dollar is expected to fall sharply.
Sounds like good news to people outside the United States, but in practice it means investors in goods “They wouldn’t know how to evaluate things,” says French.
“With a US default, investors would panic and ask, ‘Will Japan be next? The UK? Germany? Who else will default?'” he says.
“Suddenly, we have to re-evaluate everything, and in economic terms, it’s a risk premium. You get a risk premium added to the prices, so even the bread is more expensive.”
With more expensive food and fuel, the cost of living for millions of people will skyrocket.
retirements
The United States accounts for 60% of the value of global stock markets, according to Mold.
“So it’s very likely that a lot of people will have exposure to US equities when they retire whether they know it or not,” he said.
And stock markets are likely to react badly to a US default.
But it’s not all bad news.
In 2011, Democrats and Republicans were stuck on the debt ceiling until hours before a possible default.
US stocks plummeted. But the scare was short-lived, and the stock recovered from its steep decline.
Mold believes the same will happen now.
While people receiving pensions now could be affected, he says, “if you’re going to use that money somewhere in the future, then you have time to make up that shortfall.”
Source: Terra
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