The meeting between President Joe Biden and opposition leader Kevin McCarthy did not resolve the confrontation between the two on Monday, despite “a productive discussion,” according to the Republican leader, that seeks an agreement on the threat of an unprecedented default by the United States in the making.
(Also read: Biden still hasn’t reached a deal with Republicans on US debt.)
Given this, the concern arises: what would happen if the president of the United States, Joe Biden, does not agree with the Republicans and, for the first time in history, the largest economy in the world cannot honor its debts?
“Any American who directly or indirectly depends on a government payment will stop getting paid,” Gregory Daco, chief economist at EY Parthenon, told AFP.
This implies the salaries and pensions of civil servants and soldiers, social benefits related to children, health care, low income or the elderly.
(Also read: Find out if you apply to request family reunification of Colombians in the US)
Treasury risks “running out of cash to pay hundreds of billions of dollars” bills, says Nancy Vanden Houten, an economist at Oxford Economics.
“Companies that work for the government will not be paid either,” adds Daco.
On the other hand, “if the stock markets fall, (…) people’s savings and also their retirement savings would be affected,” Nathan Sheets, chief economist at Citigroup bank, told AFP.
For world markets
“From a financial markets standpoint, there would be enormous stress,” Daco said.
In 2011, when the United States came close to defaulting on its debts, the New York Stock Exchange crashed. and the S&P 500 fell “about 13-14 percent,” he recalls.
What would make a big difference is if the United States is unable to pay Treasury bondholders; safe haven from global finance.
Will international investors stop investing? Daco wondered.
For now, “investors have become more reluctant to hold sovereign debt due in June,” Treasury Secretary Janet Yellen recently warned.
If US stocks collapse, “the situation would be catastrophic for all organizations that hold a lot of US government bonds, such as banks, pension funds, insurance companies or mutual funds,” says Eric Dor, director of the school. business IESEG.
That, in addition, would imply the risk of bankruptcies and “knock-on effects with a new global financial crisis.” The dollar, meanwhile, would depreciate “very strongly,” he estimated.
The global financial system “depends on the stability of the dollar,” the Center for American Progress said May 11.
As in 2011, gold could be the big winner. “It’s the safe haven,” because in the event of a threat of default, “the dollar will fall, bond yields will fall and equities will fall,” Jack Ablin of Cresset Capital warned AFP.
For the US economy
For the United States, “the economic impact is simply that the government will stop spending,” said Gregory Daco. This will influence household consumption, the lung of the US economy.
Less public spending means “that the family that does not receive their check (…) will not be able to spend the same when they go shopping, which (…) will affect the store where they shop, which which, in turn, will later affect their own hiring decisions,” says Daco.
In addition, since the government can no longer pay its suppliers, “the companies of which the State is a client are threatened (…) by bankruptcy,” adds Eric Dor.
The cumulative financial and economic impact would cost the US economy 5 percent of GDP, says Gregory Daco. “We are talking about a bigger shock than the contraction of GDP during the financial crisis. We are talking about a huge shock,” he warned.
For the world economy
The effects would also be global in magnitude. Those of “the bonds issued by the United States would rise sharply” and would unleash chain reactions, including “a fall in investment by companies and households, as well as consumption, and therefore a strong recession in the United States”, which it could spread “to Europe and other places”, anticipates Eric Dor.
“I don’t think global or US growth will be affected significantly this year“, he qualified.
Paradoxically, the situation could benefit US exporting companies, since a depreciation of the dollar “would increase foreign demand by actually making products cheaper,” according to a note from the Council on Foreign Relations on May 2.
INTERNATIONAL WRITING
with AFP
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