The US default is one of the most discussed topics in recent times. America’s national debt is considered the largest in the world. In terms of debt burden, it is ahead of even such problem countries as Italy and Spain. The American budget deficit constantly exists, as money is regularly spent on military spending, various presidential programs, and eliminating the consequences of local disasters. The consequences of the coronavirus pandemic have played an important role in the current crisis.
What’s happening to the US national debt
The US national debt represents the amount of debt the government owes to private creditors, foreign investors, other countries and large funds. It is constantly growing, as money is needed to close the constant budget deficit. The threat of US default has been repeated over the years.
America’s spending consistently exceeds its income. This trend has been observed since the late 1960s, which is why such news of the US default regularly appears in the media. In 1971, President Nixon abolished the exchange of the US dollar for gold. The event went down in history as the “Nixon shock.” It was this that had the greatest negative impact on the accumulation of public debt.
Why is the US running out of money?
America is one of the richest countries with a strong economy, but its budget consistently lacks money. Tax revenues do not cover all government spending. Consequently, government bonds are constantly being issued, which leads to a constant increase in debt obligations.
Moreover, investors are still willing to buy American securities, since they are considered liquid. Although periodically there is panic in the stock market, and the media begin to publish expert opinions about the possible collapse of the entire global economy.
Emergency measures of the US Treasury
The threshold of $31.4 trillion was set by a general decision at Congress in 2021. The new limit was exhausted quite quickly – on January 19, 2023. At the same time, the US Treasury began to prevent default through emergency measures. The Treasury froze state pensions, stopped contributions to state pension funds and began selling assets in its employees’ accounts. Thus, by the end of August, the ministry had accumulated almost $2 trillion at its disposal.
US technical default
It should be understood that the situation in the United States is very different from the classic default in Russia in 1998. Russia was then objectively unable to pay its debt obligations. Technical default is usually associated with errors made by agencies or a software glitch.
This has already happened in America in 1979 due to administrative confusion. In 2013, government bodies did not function for 2 weeks due to disputes over the budget and new limits. The threat of another technical default was resolved only through long negotiations.
When was the US expected to default?
In January, it was clear that the debt was threatening to break another record. By May 2023, the American national debt amounted to 125% of state GDP ($31.8 trillion), forcing Congress to reconsider its ceiling again.
Why didn’t the US default?
While the American government can service debt obligations, it is too early to talk about problems in the economy. Joe Biden has said that he will gradually reduce the deficit, but so far there is no surplus in sight.
The bulk of the debt consists of bonds issued by the Department of Treasury. For this reason, these securities are called Treasuries. Repayment terms can range from 4 weeks to 30 years.
Most of it belongs to the US Federal Reserve. Foreign countries own approximately 23% of the total. America’s largest creditors are China, Japan and the UK. Russia’s investments in 2010 amounted to $176 billion, and by 2022 they were reduced to 2 billion due to sanctions.
Consequences of default in the USA
As experts agree, America is only facing a technical default, and this is not certain. There are well-thought-out scenarios for what will happen to the dollar in the event of a US default. Investors already have a number of standard actions. They are converting stocks, long bonds and non-US assets that are traditionally considered risky assets into short bonds, cash and gold.
The Russian market is more dependent on the cost of oil. In recent years, it has been disconnected from the dollar exchange rate. It is influenced by the volumes and geography of supplies, not the Brent price. In Russia, foreign currency debt is only 13%, so any crisis in America will have either a minimal or completely neutral effect.
How to choose reliable assets
Investors are advised to prepare for a US default. It is necessary to reduce the number of assets with increased risk – American and Chinese stocks, long dollar bonds, weak national currencies (for example, the lira).
How to save money in case of default
Investments in the American dollar and the UAE dirham and the Hong Kong dollar, ruble bonds and, of course, gold will help you wait out the dangerous period. The precious metal is only rising in price as central banks have been increasing their gold reserves at an accelerated pace since 2022. Against the backdrop of current geopolitical and macroeconomic risks, the upward trend in gold prices will continue.