Failure of US to Pay Debt Raises Fears of Financial Crisis

Failure of US to Pay Debt Raises Fears of Financial Crisis

The United States government has a history of paying its bills on time.

Many people, however, are worried about what would happen if the U.S. defaults on debt that it owes lenders.

Default means to fail to do what rule or law requires. In finance, it means being unable or unwilling¹ to pay back loans.

"No corner of the global economy will be spared" if the U.S. government defaulted and the problem were not solved quickly, said Mark Zandi. He is chief economist² at Moody's Analytics, a risk advising business.

The Associated Press reports that Zandi and two of his coworkers suggested that, even if the U.S. did not pay its debt for only a week, 1.5 million jobs in the U.S. could be lost.

If the default were to last longer into the summer, Zandi's team's research suggests 7.8 million jobs could be lost. And they estimate a huge decrease in the stock market would cause a $10 trillion loss in household wealth.

Public debt limit

The reason people are talking about default is because U.S. law limits the amount of debt securities the government can hold at one time. It is called the public debt limit.

House Speaker Kevin McCarthy, who is a member of the Republican Party, has been meeting with President Joe Biden, a Democrat³, to discuss the problem. The two met on Monday. Republicans want to pull back government spending increases and place limits on future spending. In return, they have said they would increase the debt limit, which is what the president wants.

Congress has raised, changed, or extended the borrowing limit 78 times since 1960, most recently in 2021.

The U.S. government borrows money from the public and from other countries by offering bonds and other securities that investors⁴ buy from the U.S. Treasury⁵.

The public buys the securities because they pay interest or increase in value over time. But, if the U.S. defaults, that might mean some investors might not get money the U.S. government owes them.

Treasury Secretary Janet Yellen has warned that the government could default as soon as June 1 if lawmakers do not raise or suspend the borrowing limit. She called June 1 a "hard deadline," meaning an important time limit.

US Treasury securities

Governments and international businesses use U.S. securities to secure credit and protect against bank losses. They also use and keep U.S. dollar securities for trade.

Because of the trust in U.S. securities, international bank officials give U.S. government debt a risk rating of zero. Foreign governments and private investors hold nearly $7.6 trillion of the debt. That is about 31 percent of the U.S. securities in financial markets.

The high demand for the U.S. dollar makes it more secure than other currencies. Because of demand around the world, the U.S. can borrow money.

U.S. dollars make up 58 percent of all foreign money held by the world's central banks. The International Monetary⁶ Fund says the euro is second, at 20 percent, and China's yuan is less than three percent.

Researchers at the Federal Reserve have said that from 1999 to 2019, 96 percent of trade in the Americas used U.S. dollars. And 74 percent of trade in Asia used dollars.

Buyers in some weak economies demand payment in dollars instead of their own country's currency. For example, in Sri Lanka earlier this year, shippers refused to release 1,000 containers of urgently needed food unless they were paid in dollars. The shipments stayed in Colombo, the capital, because the importers were not able to get dollars to pay for the food.

Some countries also use the U.S. dollar as their official currency. In 2000, Ecuador responded to an economic crisis by replacing its own currency with the U.S. dollar. El Salvador, Panama, and Zimbabwe are among the countries using the U.S. dollar as currency.

Short and long-term effects of default

Zandi and his coworkers think that if the U.S. defaults, people might still hold onto dollars near the beginning of the financial crisis. That's because the U.S. will likely continue to pay some of the money it owes. They think the dollar may still be considered safer than other currencies.

But people might start moving money into private money market funds or the bonds of top U.S. corporations. Zandi said growing doubts would decrease the dollar's value and keep that value down.

A high value of the dollar can have negative effects in some countries. It can make their currencies less valuable. It can also make it more likely for people and businesses to invest outside of their country.

However, there is not yet any other clear choice besides the dollar. The euro is far behind the dollar. China does not permit its yuan to trade freely in foreign exchange markets.

The debt limit issue is likely to increase questions about the financial power of the United States and the dollar.

Words in This Story

spare -v. to prevent something from harm that would normally happen to it

currency -n. the type of money used in a particular country

negative -adj. having harmful or undesirable effects

1 unwilling   

adj.不情愿的

参考例句：

• The natives were unwilling to be bent by colonial power.土著居民不愿受殖民势力的摆布。
• His tightfisted employer was unwilling to give him a raise.他那吝啬的雇主不肯给他加薪。

2 economist   

n.经济学家，经济专家，节俭的人

参考例句：

• He cast a professional economist's eyes on the problem.他以经济学行家的眼光审视这个问题。
• He's an economist who thinks he knows all the answers.他是个经济学家，自以为什么都懂。

3 democrat   

n.民主主义者，民主人士；民主党党员

参考例句：

• The Democrat and the Public criticized each other.民主党人和共和党人互相攻击。
• About two years later,he was defeated by Democrat Jimmy Carter.大约两年后，他被民主党人杰米卡特击败。

4 investors   

n.投资者，出资者( investor的名词复数 )

参考例句：

• a con man who bilked investors out of millions of dollars 诈取投资者几百万元的骗子
• a cash bonanza for investors 投资者的赚钱机会

5 treasury   

n.宝库；国库，金库；文库

参考例句：

• The Treasury was opposed in principle to the proposals.财政部原则上反对这些提案。
• This book is a treasury of useful information.这本书是有价值的信息宝库。

6 monetary   

adj.货币的，钱的；通货的；金融的；财政的

参考例句：

• The monetary system of some countries used to be based on gold.过去有些国家的货币制度是金本位制的。
• Education in the wilderness is not a matter of monetary means.荒凉地区的教育不是钱财问题。