The US government received the money – but only until December
When an agreement was announced in the US Congress after many days of “earning” Democrats and Republicans on the topic of the “debt ceiling”, stock indices went up sharply. To relieve Wall Street (as well as foreign stock markets), the specter of a US government failure has disappeared from the horizon, threatening a world with a new recession, as US Treasury Secretary and former Federal Reserve Chair Janet Yellen warned the next day. But as early as the beginning of December, this threatening danger could really return.
Photo: Alexey Merinov
Representatives of the Senate factions of the Democratic and Republican parties announced the long-awaited news on October 7 – just 11 days before reaching this “debt ceiling”. Republicans and Democrats have agreed to increase the US government's borrowing limit by $ 480 billion, according to The Washington Post. According to daily sources in the US Senate, this will ensure the normal functioning of the US government by December 3. Earlier, on September 30, counterparties extended, also until December 3, the current government funding for fiscal year 2021. Which, as we note, expired on September 30 – from October 1, the next, financial year 2022.
< p>If such chronology and factology seems nonsense to some readers, then so be it. But this nonsense has been a reality for many years, constantly present in Washington and from there affecting the situation in America and around the world.
Let's not go into the fiscal priorities of Republicans and Democrats, because of which they cannot agree – every year they have something “worthy” to bring the country and the world to the brink of recession. In addition, inter-party bickering is exacerbated by disagreements between the parties. This is a separate topic. Let's talk about America's impressive and incomprehensible debt ceiling.
Paradoxically, the US government does not reduce debit and credit chronically – its expenditures exceed tax revenues to the state treasury. It's not because of someone's criminal negligence – no, everything is in accordance with the law. The US Congress approves expenditures according to the state budget line, but does not allocate enough money to create these expenditures, because it does not want to increase taxes and ensure adequate replenishment of the state treasury. The government borrows the missing funds to implement the budget, which is why a “debt ceiling” is set by law. Such is the unique American absurdity.
The debt ceiling was created in 1917, when the US government issued a second series of government bonds to finance the country's participation in World War I. Congress then gave the executive branch the opportunity to borrow money to a certain limit in order to spend more than was allocated to lawmakers. And after the war, the “ceiling” was not quickly removed and instead began to lengthen again and again.
The notorious “ceiling” successfully existed for the first hundred years and replaced the second. Provides a US government debt loan with Treasury bonds from the US Treasury Department. These securities have a maturity of 10 years or 30 years (the financiers call them “long bonds”), there are also shorter-term treasury financial instruments, and US government debt securities are considered one of the most reliable bonds in the world. For this reason, other countries are investing heavily in US securities: according to Reuters, since mid-September 2021, foreign holders have held US government bonds totaling $ 7.54 trillion. Japan is in first place – $ 1.31 trillion, China is in second place – $ 1.07 trillion.
The Russian government, on the other hand, obviously knows something about US debt that the creators of Japan and China do not know: the Russian Federation has reduced its investment in US Treasury bonds to a minimum. If in February, according to the US Treasury, they were $ 12.58 billion, then in March they fell to $ 3.85 billion. In fact, from May 2017, Russia began to significantly reduce investment in US securities: at the time, that amount was $ 105 billion, and a year later – only $ 14 billion. These actions should probably not be attributed to financial and economic areas, but to political and ideological areas: you are subject to sanctioning transactions with Russian government bonds, and in response we are reducing our investments in your government bonds.
But let's go back to the US debt ceiling. In 1939, the US Congress implemented a cumulative “debt ceiling,” including all types of government loans (before that, the government set separate limits for certain borrowed instruments). Throughout history, the “ceiling” has been raised more than 100 times, and no special political dramas have taken place in this regard in the past. At the beginning of the 21st century, however, civil discourse disappeared from Washington politics, inter-party compromises almost disappeared, and there was an indignant inter-party confrontation. In such an atmosphere, both sides began to use the “debt ceiling” as a tool to discredit political opponents: behold, these scoundrels are ready to leave the elderly and the disabled without pensions, the army without financial contributions, medicine without government subsidies!
This has not yet happened, but the threat of default by the US federal government has repeatedly become quite real and has led to the most unpleasant consequences. In 2011, for the first time in history, the S&P rating agency downgraded the US government's credit rating. Investor confidence in US debt has fallen, the stock market has collapsed and a recession is looming on the horizon, from which the United States began to emerge only in mid-2009.
When it comes to government debt, “trust” is the key word. If the US government's credit rating is lowered again, CNBC warns: “It will hit a massive blow to US Treasury securities. Demand for US bonds will decline if they are no longer considered a safe and secure investment. Debt holders will require a significant increase in annual interest rates on these securities to offset the increased risk. “
And CNBC continues, “it will mean higher prices for other forms of credit, including credit cards, car loans and mortgages.” The financial firm Bankrate says that the fear of a delay that has not yet occurred is able to disrupt the stock market and shake the real economy at its core. According to investment banking company Goldman Sachs, in the event of a failure, the US Treasury Department would have to suspend approximately 40% of all current payments, including financial assistance to Americans in need.
December 3 is within reach and dangerous games in Washington with public finances, it is possible, will not allow until this date to raise the “debt ceiling”. Perhaps in the remaining time, legislators will adopt another short-term “temporary house”, or temporarily suspend the existence of a “ceiling” (this has also happened repeatedly), or the Ministry of Finance will resort to “extraordinary measures” to prevent sovereign failure and closure of state institutions. (“Closing”). But all these “emergency measures”, such as the suspension of government contributions to federal employees' pension funds, are unable to solve the problem of financing the state apparatus – except for a few days …
The US economy accounts for almost 20% of the world, so any The American financial tragedy will inevitably spread all over the world. The extent to which a US technical failure can affect Russia is a debatable question, and there are differing views on this score, from “by no means” to “deadly.” It seems that these extreme evaluations should not be taken seriously. Surely this may be reflected, quite noticeably, given the dependence of the Russian Federation on raw materials (and demand for oil and gas in a crisis situation will fall, energy resources will fall in price) and the connection of the oil and gas industry to dollar calculations.
And the Washington Democrats in the White House and the Capitol should, as The Week stressed, follow to take drastic action and remove the dangerous anachronism – the “debt ceiling” – while they are still the majority party. The indecision of Biden and his allies in Congress could deprive the Democratic Party of this status for the year that there will be congressional and senator elections in America.