US in Extreme Danger of Defaulting on its Debt

( – Recent studies indicate that if Congress does nothing, the US could start to default on its debt as early as June. Until lawmakers increase or suspend the debt ceiling, the Treasury Department is reliant on tax revenue and “extraordinary measures” to cover the costs of the federal government. To prevent a default that would wreck the US economy and world financial markets, President Joe Biden and House Republican leaders would need to step up their debt ceiling negotiations right away. House Speaker Kevin McCarthy is attempting to increase the borrowing cap to jump-start talks with the White House. Analysts are warning that it doesn’t look good, as tax receipts are weaker than expected, down approximately 35% so far.

Wells Fargo analysts now believe there is a small, but not impossible risk, that Treasury could hit the X-date in early June, with the most probable scenario still early August. The lack of agreement between Congress and the White House is causing concern in the financial markets too. The US Treasury notes that there are record high yields. The spreads on US five-year credit default swaps are rising, reflecting investors’ growing worry, and if the US defaults, bondholders may not receive their money on time.

McCarthy’s proposal would increase the debt ceiling by $1.5 trillion in exchange for several domestic program cuts, including a restoration of non-defense expenses to fiscal year of 2022 levels and a goal of keeping spending growth to 1% annually. The bill would tighten the work requirement for some food stamp recipients and set new requirements on some Medicaid recipients. The plan would also remove money put in place to address the pandemic, while accelerating new oil drilling projects. The plan would very likely be vetoed by President Biden, and it has little chance of passing the Democratic-controlled Senate.

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