The unthinkable threatens – can be financial meltdown

Wolfgang Hansson  

 

US quarrels could cause economic meltdown worldwide  

 

Published: Less than 2 hours ago  

 

This is a commenting text. Analysis and positions are the writer's.  

 

COLUMNISTS  

 

How do you write about a crisis which, if it occurs, risks shaking the world's financial system to its foundations but which everyone believes will be avoided at the last moment? 

 

It all depends on whether Republican leader Kevin McCarthy makes good on his threat to refuse to raise the US debt ceiling.  

 

Should you beat the drum and warn or stay silent and assume that everything will work out in the end? 

 

We've seen similar power measurements before. Most recently in 2011 when Republicans brought the US to the brink of financial disaster by refusing to raise the debt ceiling so that the US could pay its bills.  

 

That time, a solution was reached so late to the deadline that the US had its credit rating lowered and the world's stock markets experienced their worst week since the 2008 financial crisis.  

 

The whole thing is really a political battle where Republicans are trying to squeeze political concessions in exchange for agreeing to raise the debt ceiling.  

 

Kevin McCarthy. Photo: J Scott Applewhite/AP 

 

It may seem like irresponsible behavior but the idea is that it will help them win the 2024 election which also happens to be a presidential election.  

 

But it's a tall game McCarthy is playing. If the US can't pay its bills, it doesn't just mean financial ruin for many Americans. The whole world risks being shaken by an economic meltdown. And the Republicans will be blamed for it.  

 

This time, the potential crisis surfaced after Treasury Secretary Janet Yellen warned that after June 1 there will no longer be enough money in the US treasury to pay the country's bills. However, the date is not written in stone.  

 

Fanatical spokespersons  

 

The US has been living beyond its means for a long time. This has resulted in a gigantic budget deficit. But because the dollar is such a strong currency and American government securities are considered the safest in the world, the country has no problem borrowing money on good terms. 

 

But to force the rulers to handle taxpayers' money carefully, there has long been a debt ceiling. Simply an amount that becomes a limit after which the state may not borrow more money even if it can.  

 

For many years, the debt limit was raised more or less automatically, but as American politics has become increasingly polarized, the debt ceiling has been used as a political weapon by the Republicans in particular. 

 

It became especially clear during Donald Trump's term as president. He increased spending substantially by supporting individuals and businesses during the pandemic. That time, there were no Republicans threatening not to raise the debt ceiling or complaining that the spending increase was irresponsible.  

 

It is when there is a Democrat in the White House that the Republicans become the closest to fanatical spokesmen for fiscal discipline.  

 

In the past term, Biden has pushed through several major reform packages to help with the recovery after the pandemic and to speed up the green transition in the United States.

 

 

Deadlock between Biden and McCarthy  

 

Reforms that Republicans fundamentally dislike because they increase government spending. 

 

The Republicans' basic position is that the state should do as little as possible.  

 

Everyone agrees that the US's large budget deficit is a problem. However, there is a complete disagreement on how it should be resolved.  

 

Republicans want to pay off the national debt by cutting government spending. Something the Democrats firmly reject.  

 

The Democrats instead want to raise taxes for corporations and the wealthy. Something the Republicans absolutely cannot imagine agreeing to.  

 

There is still no sign of a deal between Biden and McCarthy. When the two met on Tuesday to try to find a compromise, they sat demonstratively far apart in the Oval Office. Nothing came out of the meeting except that they will meet again and the message that both realize the seriousness of the situation.  

 

Now the pressure is increasing day by day to resolve the situation.  

McCarthy and Biden at the White House meeting on Tuesday. Photo: Evan Vucci/AP  

 

The situation is made more difficult by the fact that no party can decide the issue by themselves. The Democrats have a small majority in the Senate and the Republicans control the House of Representatives by a fairly narrow margin. Next year's presidential election also complicates the situation as both parties want to position themselves in a way that they believe will give them victory.  

 

Coldly counting on a settlement 

 

So far, the panic has not started to spread to the world's stock markets. Everyone coldly expects that there will be a settlement. But the closer we get to June 1 without a solution, the shakier it will be. 

 

For many, it is unthinkable that the United States could go bankrupt, but if it really happens, the consequences are incalculable. The United States has been considered the very guarantor of financial stability in the world.  

 

Exactly what will happen if the US suspends the payments is impossible to say because it has never happened before. So let's hope we don't have to find out. The world has enough crises without us having to endure one that American politicians manufacture on their own.