By Dayo Yussuf
When it comes to the global economy, the United States has been sitting pretty at the top for decades, or so it is said.
We all think of it as the world's superpower, with all the resources at its disposal.
Indeed, isn't that why many people packed their bags, sold their belongings and said goodbye to family and friends — just to move there? To the proverbial land of milk and honey?
But that's probably in the past. You don't need to look deeper to realise there seems to be trouble in paradise.
The US Congress is engaged in heated battle whether or not to allow the Biden administration to increase borrowing rights.
D-Day approaching?
Since 2001, America has not been able to sustain its spending because it isn't making money at the same rate it is spending. This period has also seen the country's expenditure soar beyond its limits.
Whether it is funding technology advancements and wars or tackling climate change, the country has literally been digging deeper and deeper to keep up with itself. So, for many years the government has been borrowing money to keep the lights on, as it were.
But there is a limit to borrowing, which in fiscal parlance is called a "debt ceiling". If the ceiling is not suspended or increased in time, or before the country runs out of money to conduct business, that would imply defaulting on paying off its debts and meeting day to day needs.
This date appears to be approaching fast. Initially, the US treasury worked on the assumption that with the amount remaining in its coffers, it would be able to push until August before ending in the red.
But after re-evaluation, the treasury suddenly announced that it couldn't go beyond June 1 without a resolve.
Where does the US borrow from?
As a perceived "rich" country, it is hard to imagine even America borrows money from somewhere. But it does.
And the irony is that the same country America criticises relentlessly happens to be its lifesaver: China. "Right now, the biggest threat to America is not Russia, but China," says Dr Anthony Francis Mveyange, a development Economist in Kenya.
"And the US will do everything to make sure it does not default on its debt with China," he says,
Since 2011, America’s debt ceiling has gradually increased from $11.9 billion to its current $31.4 trillion.
But since the country wasn't making enough to sustain its expenditure during this period, it was forced to borrow from more than one place.
Some of its top lenders are:
• Japan – $1.1 Trillion
• China - $859 Billion
• United Kingdom - $668 Billion
All of this amounts to 31% of America's total debt. The country also borrows from within, making up the remaining 69%. This comes from local businesses, banks, pension funds, mutual funds and households.
Economists say that America's debt crisis needs to be viewed differently from that afflicting other countries.
"America would not really default on its debt the way it happened with Greece, or Argentina, or Zambia. This is because America's debt crisis is not from an economic turmoil, but more of a man-made problem," says Mveyange.
What happens if it defaults?
In the worst-case scenario, if a deal is not reached by June 1, the country will face catastrophic consequences.
The first is loss of trust, which has never happened before, although a few times it did come really close to that.
"Just like it is with your personal loan, a default would mean you are no longer reliable to lenders. Lenders would no longer trust the US with paying back money in full or in time," explains Mveyange.
Then comes cost of borrowing, which is the effect of renegotiating lending terms. "Nobody wants to risk lending money to someone who may not pay back. So, even if you do lend them you would have to increase interest rates as a safety net. We have seen it happen with loans to African countries," says Mveyange.
Sustainability is the third axiom that will be affected. For a government that depends on credit for its day to day business, there would be no way to keep going.
Government services would shut down, salaries would not be paid, pensions would be pending and local productions would come to a halt.
Similarly, companies would be forced to lay off people, job loss would lead to recession and, if not sorted soon enough, bring about a terrible economic depression that may not be reversed.
A fourth, and equally important, factor is bank rush. Many banks lend money to the government through bonds and treasury bills.
When word gets out that the government cannot payback the banks, people who deposit their money with banks will try to secure their savings by withdrawing. A bank rush would mean collapse of banks and stock markets. Recession is then inevitable.
Political blackmail
According to Mveyange, the push-and-pull game between Democrats and Republicans has been going on for years.
"We saw it in 2011, during Barack Obama's time. Republicans wanted to cripple the administration so they used the debt ceiling as a bargaining chip," the economic analyst says.
Both Republicans and Democrats can be blamed when it comes to this "artificial" debt crisis plaguing the US.
During debates in the Congress and the Senate, most would push for concessions from the opposing side, depending on who is in government at the time. This does not mean the President would not have a way out.
In the worst-case scenario, like it was with Obama, the sitting President might threaten to invoke the 14th amendment of the American Constitution, which in a nutshell allows the President to bypass Congress.
But analysts say this would only open more complications and lengthy legal appeals.
"At the moment, the Biden administration is relying on the fact that the majority of Republicans in the House are owners of big businesses and would not want to see a recession," says Mveyange.
Many analysts are convinced that there is already a consensus among both sides that the US should not be pushed into default under any circumstance as that would mean the country losing its predominant status in the world's hierarchy.
"They would never allow the economy to collapse unless they are willing to give up their position as the world's leading economy," predicts Mveyange. "If they allow this to happen, surely the American people won't forgive them," he says.
