China Is Horrified of US Defaulting on Its Debt

China Is Horrified of US Defaulting on Its Debt

( – It takes a great deal of money to keep the United States government moving. When the amount budgeted for all of the different programs exceeds the amount received in taxes, the Treasury Department borrows money from other sources. When one considers that America is the world’s largest economy in terms of Gross Domestic Product (GDP), it should be obvious why the current stalemate between the Republican-led House of Representatives and Democratic President Joe Biden on raising the national debt ceiling could be of concern to governments and people around the world.

Immovable Object vs. Irresistible Force

Under the United States Constitution, the House controls the purse strings of the country, but as with most everything in the world, that does not exist in a vacuum. The budget must be established through a law which means that the occupant of the Oval Office has the ability to veto it, meaning that Congress would need a super-majority of two-thirds of each house to override the action.

The People’s Republic of China (PRC) state-run media site Xinhua published an article on May 24 with a headline declaring that a default by America on the country’s debt would create “huge uncertainty with catastrophic implications.” They mention an interview they had done with David A. Super, a professor at Georgetown University Law Center, who seemed to put the blame on partisan politics without calling out either party specifically.

The Xinhua article claims that Super pointed to the “extreme polarization” with the result that “any member of either party can get in a lot of trouble if they are seen cooperating with the other party.” Most Americans who pay any attention to politics would probably agree with his characterization that the core differences between parties on deficit reduction versus tax cuts mean that “there is no basis for an agreement.”

What Happens If We Default

As of the evening of May 24, the website tagged the national debt at around $31.8 trillion, with a net interest on it of more than $572 billion. To put that into perspective, the US Navy website estimates that the total cost for World War II was roughly $296 billion, which would translate to $4-$5 trillion in 2023 dollars, or just one-sixth of the current debt.

Financial markets are seeing some jitters set in already, with the Dow, NASDAQ, and the Standard & Poor’s (S&P) 500 all trending downward, as were cryptocurrencies Bitcoin and Ethereum. Right now, foreign investors hold approximately $7.3 trillion of the total debt or roughly 23%.

The group at Moody’s Analytics created what they see as a possible scenario of what would happen if default occurred but lasted a week or less. They believe it would cut 1.5 million American jobs and continue or deepen the economic recession. In their hypothetical examination of an impasse lasting through July, they say, “[t]he blow to the economy would be cataclysmic.” They also envision a situation where “global investors sell or stop buying US securities” and a loss of more than 7.8 million jobs, which would push the unemployment rate to at least 8%.

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