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Bankruptcy of America?  This is what the dollar says - the concept is just right

Bankruptcy of America? This is what the dollar says – the concept is just right


Feedback Just Terks

7 October 2021

Political stubbornness and outdated financial rules are a dangerous combination in the United States. If President Joe Biden misplaces his cards, he risks bankrupting the country. Although

Anyone who has taken out a mortgage in recent years knows that there is a limit to how much you can borrow. However, most countries are not affected by this. However, the United States is an important exception. Since 1917, the country has had a debt ceiling, which indicates how big the national debt will grow. That provision was added during World War I when the law was changed to facilitate the issuance of new loans to finance the war industry. In recent decades, however, political parties have increasingly used this measure to suppress the opposition.

Officers sent him home
When the ceiling was hit two years ago, the government ran out of money to pay the bills. On the night of October 1, 2019, nearly 800,000 government employees found themselves at home. It could happen again later this year. To raise the debt ceiling, a majority of 60 votes is needed in the Senate. Republicans are in 50 of the 100 seats up there. In this party’s view, public funds are being eroded by Democratic Party leader Joe Biden’s massive investments in health care, climate and infrastructure. They do not want to raise the credit limit and thus cooperate with Biden’s plans.

Opponents walked out of the game
While Republicans are willing to give Democrats more time to resolve the debt problem, a real solution is far from in sight. On paper, Biden has the ability to sideline his opponents and adjust the debt ceiling himself. But, it seems he will not use it. If he does, he will provide the Republicans with a powerful argument that he can use to attack his monetary policies. This is a dangerous move, and next year’s by-elections will threaten the small Democratic majority in the Senate.

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Technically bankrupt
Treasury Secretary Janet Yellen has already warned that the country could enter a recession if the debt ceiling is hit and that the United States can no longer meet its obligations. If so, the country would be technically bankrupt too. Despite this small risk, the dollar has risen to a one-year high against the euro. While this rise is mainly driven by rising inflation, it also increases the likelihood of interest rate hikes, and the strength of the dollar can be seen as a safe haven in times of uncertainty. This is a sign that financial markets are not yet free from the political tussle surrounding the US debt ceiling, despite possible delays.

Just Terks

Just Justs is a currency expert iBanFirst. Has more than twenty years of experience in the world of currency. This column reflects his personal opinion and is not considered professional (investment) advice.