Macroscope | Economic turmoil looms as US debt ceiling crisis drags on

Name: Joe Biden announces bid for second 4-year term as US President
Uploaded: 2023-05-01T13:00:11.000Z
Duration: 1 min 48 s
Description: Joe Biden announces bid for second 4-year term as US President

With Republicans and Democrats going into election mode, the US debt ceiling stand-off could go down to the wire, with financial markets suffering extreme pain

Investors who remain oblivious to the risk of default should note that sovereign players like China are already selling down their US Treasury holdings

Reading Time:3 minutes

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House Speaker Kevin McCarthy talks to reporters at the Capitol in Washington on April 26, just after the Republican majority in the House narrowly passed a sweeping debt ceiling package to try to push President Joe Biden into negotiations on federal spending. Photo: AP

David Brown

Published: 9:00pm, 1 May 2023

There’s a very good chance the world is sleepwalking into another global financial crisis. With Capitol Hill still effectively gridlocked over the US debt ceiling, the clock is ticking and it’s only a matter of time before markets hit the crash barriers.

Short-term disaster might have been avoided by last week’s vote in the Republican-dominated House of Representatives agreeing to raise the US$31.4 trillion debt ceiling by US$1.5 trillion, but it won’t pass muster in the Democrat-controlled Senate and it’s almost certain to be vetoed by President Joe Biden should it land on his desk.

There’s too much at stake as the proposed Republican cuts in US government spending go too close to the bone of Biden’s domestic reflation initiatives to reboot growth and rebalance the economy. The impasse over fiscal policy has simply been kicked down the road for lawmakers to resolve next year, meaning investors are at great risk.

Unthinkable as it may be, could a US debt default really happen? The United States has been close to the edge before with budget brinkmanship, with the government forced into temporary shutdowns in the past when the Treasury debt ceiling was hit. But deals were always struck in the final hour and disaster was avoided. This time may be different.

House Speaker Kevin McCarthy has insisted the Republican Party would never allow the US government to default on its debts, but that’s not to say a major credit event is never going to happen. With US government debt currently running at 120 per cent of gross domestic product and nearly twice as high as the level preceding the 2008 global crash, it’s unsustainable over the long term.

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Joe Biden announces bid for second 4-year term as US President

The market’s appetite for US government assets is fast reaching a critical point. Either the US government embarks on major cost-cutting austerity, or it needs to grow its way out of the debt crisis. The Republicans and Democrats are deeply at odds and seem irreconcilable.