Jorden McVeagh, Editor
The political debate between Democrats and Republicans has been one that has stood the test of our country’s history. With both sides set in their ideologies, it has become almost a surprise when, if ever, the two parties meet in the middle to agree on something. This divide between the country’s two leading parties may lead to the first-ever US default. Many attribute this possibility to the Republican-led House of Representatives which holds control of the US credit rating.
Amanda Andrade-rhoades | Reuters
As a result, they are using this control as a negotiation tactic for policies. Many are concerned about what this will do to our relationships with other countries, especially in Asia. In 2011, we had a similar political structure with a Republican-held House where members of Congress continually delayed increasing the borrowing limit needed for the US to pay off some of the debt it was carrying. As a result, the US was demoted from an AAA credit rating resulting in many of their benefactors losing money. Many of these benefactors were in Asia. As a result, many of the larger banks in Japan and China have reduced the amount of money they are putting into US-backed Treasuries. The Bank of Japan and the People’s Bank of China are just two of those that cut back on their Treasury investments. The US Federal Reserve knows what has happened in the past and has warned any investors with money in Treasuries of the risk they are taking on when leaving the money where it is. In a quote taken from a meeting log, one Fed official was quoted saying, “A number of participants stressed that a drawn-out period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy.” Fed Chair Jerome Powell says that he and his team are more worried about the potential economic problems than the events in Ukraine. It is important to note that he is not talking about the overall implications of both events, but the timeliness of how this economic situation will be discussed in Congress.
The US’s current debt stands at $31.4 trillion and losing financial credibility could prove to be costly. Former Fed Chair Janet Yellen and her team are in the process of implementing accounting measures to help Washington. While it was not mentioned what those measures are, they are only expected to hold for a few months, thus lawmakers need to act quickly. The article then went on to discuss how the division between the two political parties could be a disaster when other developed countries look at the US. Instead of looking at the US as one market, it will be segmented based on which sector you want to operate or deal in. President Biden realized the substantial impact this may have not only on the US economy but globally as well, saying a default would be a calamity for the global economy. This will be something to keep on the watchlist in the coming months, but according to economists at Goldman Sachs, this deadline will not come until at least August.