The failure to address the debt ceiling and the potential for an unprecedented default on debt could have severe consequences for the US economy. A prolonged breach of the debt limit could lead to job losses, higher borrowing costs for households and businesses, diminished consumer confidence, weakened bank balance sheets, and even trigger a recession both in the US and globally.
If a recession or significant economic slowdown were to occur in the US, it would have an impact on emerging economies through reduced trade flows. Additionally, an increased likelihood of a debt default could lead to heightened volatility in financial markets and affect capital flows. Such an event could significantly damage the perception of the US dollar as a safe haven currency.
Indeed, the current debt ceiling stands at USD 31.4 trillion, and it was breached in mid-January. To manage the situation, the US Treasury has implemented extraordinary measures to control spending and maintain cash flow for the government.
The main challenge in raising the debt ceiling lies in the disagreement between Democrats and Republicans regarding whether the increase should be accompanied by spending cuts. Republicans advocate for spending cuts to be tied to the debt ceiling increase, while the American President opposes linking spending cuts to the debt ceiling and prefers a clean increase without conditions.
This stalemate is prolonging the resolution of the debt ceiling issue. With the extraordinary measures in place, the Treasury can fulfill federal obligations only until June 1st. Failure to address the debt ceiling could lead to frozen federal benefits, job cuts, an economic recession, higher borrowing costs for households and businesses, and increased financial market volatility.
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