Speculations are rife worldwide about the consequences if the economic superpower, the United States, fails to repay its debts or is unable to meet its salary obligations.
Concerns have emerged suggesting that America may be approaching this critical condition. While the possibility of such a scenario is unimaginable since America has yet to default, questions arise regarding the potential for a major crisis looming over the nation.
Understanding the Debt Burden on America
To comprehend the situation, it is essential to grasp how a country’s economy functions. Analogously, consider a household where income and expenses coexist. While a nation’s income primarily comes from taxes, expenses are incurred on salaries and social programs.
In most countries, expenditures surpass income, resulting in an economy operating at a deficit. In such cases, taking a loan becomes necessary, similar to what one would do in their own household.
The Extent of Debt
America has set a limit of 31.4 trillion dollars on its borrowing capacity, which it cannot exceed without parliamentary consent. This limit was established after America realized during World War I that excessive debt would burden future generations.
Since then, efforts have been made 78 times to raise or expand the debt limit, resulting in the current figure. However, reaching the debt limit on January 19 prompted accounting adjustments and necessitates taking a new loan to repay the existing one.
Searching for Solutions
Breaking the debt limit has been attempted since 1960, with adjustments, expansions, and changes in its definition. However, relying solely on taxes will not suffice. Taking on more debt is necessary to meet ongoing obligations.
Timeline and Challenges
The US Treasury Department recently warned that cash reserves could run dry by June 1, although this is an estimate subject to change. Before this deadline, political parties in America must agree to increase the debt limit.
Failure to repay the existing loan would result in a default, preventing salary payments to employees and halting social programs and other obligations.
Party Perspectives
The two major parties in America, Democrats and Republicans, are engaged in ongoing discussions, but differences persist on various issues.
Republicans aim to reduce government expenses, while Democrat President Joe Biden, who faces the upcoming presidential elections, is cautious about potentially unpopular spending cuts. Democrats believe that Republicans may face limited public pressure in this regard.
Historical Precedent
The issue of loan default has become a political weapon in America. Opposition parties demand concessions before giving their consent, while the ruling party takes a different stance.
Similar tensions arose in 2011, with a deal reached just two days before the default date, including expenditure reduction under the Obama administration. Nonetheless, the stock market experienced turbulence, and America’s credit rating suffered a decline.
Seeking a Resolution
Currently, it is believed that American leaders will not allow their country to default, although it may take time to reach a resolution. US President Joe Biden has postponed an important foreign trip, emphasizing the need for talks.
The potential consequences of a default, including damage to America’s superpower status and the risk of recession engulfing the nation, are well understood. Furthermore, approximately 8 million Americans could lose their jobs.
Impact on India
India could also feel the repercussions of America’s debt crisis. Decreased demand in America would affect exports, impacting Indian companies. India’s software industry already faces challenges due to declining US demand.
As the majority of global trade is conducted in dollars, many countries hold dollar reserves. If America is unable to repay its debts, the credibility of the dollar would decrease, prompting the US central bank to raise interest rates. Consequently, interest rates in India would also rise.
