You may have noticed that America, the world’s most important and dominant economy, is slowly but surely moving towards its debt ceiling. If recent estimates are correct, the US will hit that ceiling in the first weeks of June.
Technically, the ceiling was even tapped in January 2023. From that moment on, the country had to make up its cash reserves.
There is nothing new under the sun
The US is no stranger to reaching the debt ceiling. The ceiling has been raised 78 times since 1960. In that sense, it’s not as exciting as it sounds. For Republicans, it’s primarily a way to put pressure on the Democratic administration of President Joe Biden.
They are demanding that the government pledge to reduce its spending before Congress agrees to raise the debt ceiling. Joe Biden (of course) believes the debt ceiling should be raised without demands and conditions.
America’s mounting debt problem is particularly evident from growing interest payments. Historically, those interest payments have cost the United States about 50 percent of their annual defense spending.
However, interest costs have now risen to almost as much interest as US defense costs. In other words, the entire U.S. military costs more debt annually.
But today is different…
Although the debt ceiling has been raised a dozen times over the years, things will be a little different this year. In general, politicians were able to reach an agreement very quickly about raising the debt ceiling. Everyone says an agreement will be reached in the long run, but it has to happen eventually.
According to Visual Capitalist This is mainly due to the increased political polarization in the US, which contributes to the fact that the negotiations are taking so long. However, America cannot be imagined in reality ‘bankruptcy’ Because it can no longer pay its debts.
It is true that the longer politicians take to reach an agreement, the more expensive it becomes. For example, in 2011, an agreement was reached just before the deadline. As a result, S&P downgraded the US government’s credit rating from AAA to AA+.
That change added $1.3 billion in additional borrowing costs. It’s not a huge sum for America, but sums you can still achieve good things with. As such, expect a lot of fireworks on this subject in the coming weeks.
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