There is a lot of political tension in the US over the national debt ceiling, which stands at about $31 trillion (one thousand billion), which would be about 124% of US GDP in 2022. This is not the first time that the specter of exceeding the cap set by Congress has caused friction among politicians. But this is the first case in history when the US went into “default”.

The importance of the situation is added by the statement of some people responsible for economic policy

The Treasury Secretary, US Treasury Secretary Janet Yellen (Jerome Powell’s predecessor at the Fed, US Central Bank) is talking about a “disaster” if the ceiling is not raised.

Is the US facing actual bankruptcy? Economic common sense tells you no, and the arguments for this are given below. Instead, the federal government will not be able to make some payments on time because bond issuance will be limited. In this situation, the US Treasury has temporary emergency measures. Wall Street leaders said they were considering a worst-case scenario.

Why is bankruptcy in the US nonsense? Because, among other things:

• the markets do not signal that the American economy, the American state is experiencing difficulties with financing;

• the institutionally imposed limitation is the cause of the current dispute;

• the American economy is approx. 25% of world GDP, and the US dollar means almost 60% of the world’s foreign exchange reserves (for comparison, the euro means about 20%);

• The USA is the first technological and scientific power of the world;

• Inflation in the US reached a plateau some time ago, it is gradually declining, and the rate of inflation in the US is setting the tone in advanced economies

• A “default” of even short duration would surely send the American economy into recession; this will highlight the credit crunch that was somehow caused by the tightening of monetary policy.

It is hard to imagine a situation in which a Democratic administration and Republicans in Congress will not reach a compromise that will end the domestic impasse. Because this is not only a question of the functioning of the American state, of trust, but also of consequences for international markets.

A sharp fall in the quotations of US securities, bonds and treasury bills (due to market valuation, see also CDS dynamics), which is a consequence of the long-term blocking of new issues, will affect asset portfolios in the world, in addition to the consequences of an aggressive strengthening (by more than 5%) of monetary Fed policy.

The US dollar is likely to depreciate, affecting commodity prices in international markets. We will have new financial shocks that will add to the turmoil caused by the problems of some banks. And geopolitically, the US will take a hit, given its overt and covert international commitments.

Let’s think that the central banks, first of all, with the Fed, seek to agree on a swap; dollar is considered as the main monetary asset in the world. Such resonances show why it is difficult to accept that politicians in Washington will not find a compromise that protects the US as the backbone of the international financial system and takes into account the possible very bad consequences for the world economy.

It is legitimate to ask whether the US can afford to continue running large budget deficits, which would call into question the sustainability of its national debt.

As long as the interest rate on the debt is lower than the growth rate of GDP, the public debt can grow while being sustainable – it can be kept at an acceptable level as a share of GDP. But in recent decades, national debt in the US and other advanced economies has increased as a share of GDP (note: at the end of World War II, in 1945, US national debt was about 112% of GDP). The global financial crisis, the pandemic, the energy crisis and the war in Ukraine, and other extreme phenomena have strengthened the desire of governments to increase budget expenditures and increase the budget deficit.

But even developed countries cannot have a large deficit, constantly growing debts. At some point, it is possible to fall into a “debt trap”, which will force the markets to react violently, demanding much higher interest rates for financing. In addition, lower inflation will no longer contribute to budget performance (public debt to GDP) as it did in 2022, the year of the big inflation shock, as “surprise inflation”.

State budgets need to be adjusted, despite the fact that there is great pressure on the expenditure side due to the disappearance of the “peace dividend” (increased military spending), climate change, demographics (crisis of the social/pension system). Governments will have great difficulty restructuring public spending, especially where budget revenues are low. For the US, the analogy with Japan (whose national debt exceeds 220% of GDP) has limited meaning, since almost all Japanese sovereign bonds are owned by Japanese residents and, moreover, they save a lot.

For countries with developing economies, the correction of the budget deficit is even more necessary. The importance of European funds for Romania can also be considered in this context, as well as the quality of investments and reforms that are being carried out.

Until then, the US can borrow more easily than the rest of the world’s economies, thanks to its economic power and the sovereign rating it holds. I do not understand how it is not possible to get out of the current political impasse. But the US should not consider the growing national debt to be limitless.