Inflation has decreased from its June 2022 peak as the Federal Reserve increases interest rates and the labor market strengthens. Despite mixed signals from small bank challenges and economic activity surveys, the possibility of a recession-free disinflation period, known as a “soft landing,” still exists.
However, a debt ceiling will be set in early June, which could lead to disastrous consequences if the US defaults on its government debt. The US is heavily indebted after implementing fiscal stimulus measures during the pandemic, and a balanced deficit reduction plan wouldn’t hurt. The White House is proposing $3 trillion in spending cuts and tax increases over the next decade, while House Republicans are threatening a default if the government doesn’t agree to a $4.8 trillion cut.
If the Republicans do not come to a compromise, the United States will be pushed to break the debt ceiling, with serious economic consequences. US government bonds are the foundation of global financial markets, and the US currency remains the primary medium of exchange. World Bank President David Malpass warns that “the world’s biggest economic woes are clearly bad for everyone.”
President Joe Biden has insisted he will not negotiate a higher debt ceiling, but the best way to resolve this impasse is to cite the Constitution and ignore conflicting directives from Congress, or pay the US debt. It may mean that it is bold to mint platinum coins, which were previously seen as a far-fetched idea but may be necessary to avoid a crisis.
The US debt-to-GDP ratio is projected to rise from about 97% to nearly 120% by the early 2030s, worrying many economists. Investors are forcing the government to pay higher interest rates before the US debt ceiling expires.
The White House wants to close the gap by cutting spending and raising taxes worth about $3 trillion over 10 years. Republicans primarily propose cutting spending alone by $4.8 trillion through arbitrary spending caps, but the caps are usually ignored after a few years.
In conclusion, the possibility of a debt crisis remains, and it is essential to avoid worst-case scenarios. While policymakers may need to resort to drastic measures, such as minting platinum coins, it is crucial to remember that the global economy is interdependent, and any economic crisis in the US will affect the world.