The lingering problem surrounding the US government’s debt ceiling rise will destabilize the financial world.
For now, considering the dollar has strengthened against the euro, this is rarely observed in the currency markets.
Currency expert Justin Derx explains why US debt finance is important.
Analysis – The financial world breathed a sigh of relief when the US Senate narrowly rejected the government last week. Temporarily gave some more borrowing space. However, it is only a matter of weeks before the debt issues get the attention of all of us again.
If you can no longer pay your mortgage, you have a problem. But if the United States goes bankrupt, the whole financial world is in trouble. In some countries together, there is a limit to how much you can borrow. The United States has had a debt ceiling since 1917.
First, this rule was added during the First World War when the law was amended to make it easier to provide new loans to finance the war industry. In recent decades, however, political parties have increasingly taken steps to control the opposition.
The ceiling was knocked down two years ago. As a result, the US government ran out of money to pay the bills. Overnight, on October 1, 2019, about 800,000 government employees were at home. It could happen again later this year or early 2022. Raising the debt ceiling requires a majority of 60 votes in the Senate.
The US debt ceiling issue has not been resolved
With Republicans controlling 50 of the 100 Senate seats, the majority in the U.S. Senate is far from over. In this party’s view, public funds are being destroyed by massive investments in Democrat President Joe Biden’s health, climate and infrastructure. They do not want to raise the credit limit and thus cooperate with Biden’s plans.
The good news is that Republicans are willing to give Democrats more time to solve the debt problem. Thanks to last week’s agreement, it took several weeks for the issue to reappear.
The bad news is, a solution is not yet in sight. On paper, Biden can sideline his opponents and adjust the debt ceiling on his own.
However, it seems he will not use it. If he does, he will give the Republicans a powerful argument that he can use to attack his fiscal policies. Next year’s midterm elections threaten a small democratic majority in the Senate.
Confidence in the dollar is strong for now
If Biden fails to gain the support of some Republican senators and refuses to force a solution, the country will be technically bankrupt.
Treasury Secretary Janet Yellen has already warned that the country could sink into recession if the debt ceiling is hit and that the United States can no longer fulfill its obligations.
Despite the problems surrounding the debt ceiling, Dollar To its highest level in more than a year against the euro.
While this improvement is mainly driven by rising inflation, it also increases the likelihood of a rate hike in the US as the strength of the dollar and the role of the US currency as a safe haven in times of uncertainty.
For now, financial markets are hopeful that the US debt ceiling issue will eventually be resolved, but the dollar is definitely at risk for something.
Just Justs is a currency expert iBanFirst. He has more than twenty years of experience in the world of currency.
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