The United States is racing against time to overcome the crisis of raising the public debt ceiling after it exceeded $31.4 trillion, amid warnings from the US Treasury Department.
Raising the debt ceiling is a legislative maneuver that allows the US economy to continue paying its bills to its creditors and wages to its employees. The debt ceiling has been set so far at $31 trillion, which is a record for all sovereign debt in the world in absolute terms.
The Republicans require agreement to raise the debt ceiling in return for budget cuts. For their part, the Democrats refused to negotiate spending cuts, and said that Republicans should demand spending cuts when negotiating the budget, not the debt ceiling.
In 2011, the United States faced a similar situation, which led to a downgrade of its credit rating.
What happens if the US defaults on government bonds?
Reducing government spending automatically, which will negatively affect the US economy as a whole (the share of government spending in US GDP is 37%).
High yields on short-term US Treasury bonds, which will exacerbate problems in the US banking sector and slow down lending.
The effect on the US currency and the possibility of a contraction in the US GDP.
An economic slowdown should lead to lower commodity prices (oil and metals).
Assets to avoid:
US government bonds.
Stocks of banks and insurance companies in the United States and the world.
Stocks of commodity companies in the US and around the world.
Stocks of US companies that focus on the US market.
How can it be hedged?
There is a group of assets that fulfill the protective function, and in particular can be highlighted:
Gold.
European government and corporate bonds rated AAA.
Bitcoin.
Japanese Yen.
Swiss franc.
Historical overview.. What is the US debt ceiling?
The US public debt ceiling is the maximum amount that the US government can borrow to pay its financial obligations under the budget such as payments for Social Security and Medicare.
The United States spends more than it receives, so it resorts to borrowing, and to borrow, the US Treasury issues securities such as government bonds, which are paid back in the end with interest.
But once the US government reaches the maximum limit, the US Treasury cannot issue more bonds, so the debt limit must be raised.
Congress is responsible for raising the debt ceiling, which has now exceeded $31 trillion. The US has never defaulted on its payments before, so if that happens it will have major repercussions for the markets.
Despite the fierce debates and strong statements by US politicians and officials, the process of raising the debt ceiling for the United States is a routine process. Since 1962, the ceiling has been raised 83 times.
This article was originally published by RT.
