Debt Struggles in America: It’s Affecting Us Too

Debt Struggles in America: It's Affecting Us Too

31.4 trillion dollars or more than 29,000 billion euros. That’s the total amount the US federal government is now allowed to borrow.

That maximum amount must always be adjusted, for example in relation to inflation. ceiling $11.5 billion 1917 would now be a trifle.

Political games

But such increases have fueled years of political wrangling between Republicans and Democrats. 140 CEOs of major US companies have already warned against it Hell and damnation Unless the loan ceiling is raised.

Still, experts feel that soup should not be eaten so hot. If politicians can’t do this, the US government still has money, explains RTLZ stock market commentator Jacob Schoenmaker. No matter what, the taxes keep coming. “Can’t pay all the bills anymore.”

Then the government will set priorities, says Philip Marie, US economist at Rabobank. Interest and principal on bonds are paid first, followed by benefits and salaries of government employees.

Disadvantages for the Netherlands

Nevertheless, Marie thinks that if the politicians in America cannot agree, it will be to our disadvantage in the Netherlands. After all, if US government employees don’t get paid for a certain amount of time and are not given benefits, consumers in the US can afford to buy less.

Mary expects that other Americans still earning wages will also fall in confidence in the economy, so they will spend less as well. And that means we can export less to the US.

Low stock prices

And lower consumption in the U.S. is also hurting the profits of U.S. companies. This is bad for share prices, including in the Netherlands. After all, investors are looking with a slanted eye at the U.S. stock market, which is still the world’s largest.

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Falling stock prices dampen consumer confidence, which in turn reduces their spending, Mere says.

problems

But the only real problem will be if bondholders (the people, companies and governments that have lent money to the U.S.) don’t get paid anymore, Schoenmaker expects. Then the credit rating agencies immediately downgrade the rating for US government bonds.

Such a rating is a score that indicates how creditworthy the US government is. Schoenmaker thinks U.S. government bonds will immediately receive a ‘D’ rating, which can’t be any lower. Credit rating agency Fitch has already warned that the US could lose its credit rating even further.

Financial system

With lower valuations, the entire financial system could grind to a halt, Schoenmaker fears. US government debt plays a very important role in financial markets. For example, the US dollar is still the world’s most important currency and US government debt is used as collateral in financial transactions more often than any other government debt.

But if U.S. government bonds aren’t accepted as collateral because of low ratings, Schoenmacher says, you’ll have to use cash. “Investors will also sell other investments, such as stocks or Dutch government bonds, to free up that cash.”

‘The foundation has fallen’

Another problem is that US government bonds are used as a starting point (‘benchmark’ in jargon) to calculate so-called risk-free returns, Mary adds. Investors assumed that the US government would always pay interest and principal.

If they take more risk, for example by lending money to other countries or companies rather than the government in the US, or if they buy stocks, they should be rewarded for the extra risk they take. They charge a certain interest rate or yield on top of the interest they earn on U.S. Treasury securities. But if you don’t get back the money you lent, Mere says, that benchmark expires, and thus the foundation of financial markets.

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‘Not high, but low interest’

What Schoenmaker points out is that a lower rating for US government bonds will not raise interest rates on those bonds (because investors may want to compensate for the higher risk of default), but will cause them to fall.

During times of turmoil in financial markets, interest rates almost always fall, Schoenmaker explains. Above all, investors expect the central bank to cut interest rates to counter the effect of unrest on the economy.

He says the US dollar and even the US will continue to be a safe haven for investors. America is still the world’s largest economy.

In the eurozone, especially in Germany and the Netherlands, interest rates could be cut further, says Schoenmaker. After all, if we continue to pay principal and interest, the risk associated with European bonds is low. But there are downsides, such as the aforementioned lower exports, which Mary expects will put pressure on our economic growth.

‘Bad to all’

All in all, if the debt ceiling isn’t raised it’s a disadvantage for everyone, Mary concludes.

America now has the privilege of borrowing in its own currency and at lower interest rates than other countries. Removing the foundation under the financial system would undermine them, he thinks.

‘coming out’

“Nobody wants it, so they’ll do it,” Schoenmacher anticipates. But according to him, this does not mean that the situation is no longer volatile, as global debts have risen in recent years.

The debt ceiling is there for a reason and with the coming aging population it will become increasingly difficult to make interest and repayments because the money earners become a smaller and smaller part of the population, he says.

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Politicians really want a solution by the end of this week, Mary says. After all, the law still needs to be amended and passed by the Senate and House of Representatives. “So they’re already late.”

In this video we can see what we can observe in the fight over money in America:

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