The world could be on the edge of a global financial crisis if the US debt limit is not raised. On Thursday, the USA reached its $31.4trillion debt limit on Thursday and has begun measures to stop the crash from happening. If the US defaults on its debt, it could spell disaster for the world economy.
As crisis looms, President Joe Biden has entered into talks with those who could fix the issue, including Republican House of Representatives Speaker Kevin McCarthy.
Mr McCarthy could raise the US debt ceiling in order to avert disaster. However, this would mean the Democratic president making a deal with Republicans over the matter. Bank JPMorgan Chase has warned a failure to secure the deal would have large-scale ramifications for the US and global economy.
Speaking to CNBC’s Squawk Box, CEO of JPMorgan Chase Jamie Dimon said: “We should never question the creditworthiness of the United States government. That is sacrosanct, it should never happen.
“Of course, Democrats can blame Republicans and the Republicans can blame the Democrats. I don’t care who blames who — even questioning it is the wrong thing to do. That is part of the financial structure of the world. This is not something we should be playing games with at all.
“Americans should understand that the American financial system is basically the crux of the financial system of the world and we shouldn’t play with it.”
In a letter, US Treasury Secretary Janet Yellen wrote: “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”
She added that a US debt default would “cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability”.
To get an idea of just how much harm, economists have said six million jobs could be lost overnight by the US defaulting on its payments.
The President’s press secretary Karine Jean-Pierre has said there was a “duty” to raise the limit.
She added: “Like the President has said many times, raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” she said.
“Congress has always done it, and the President expects them to do their duty once again. That is not negotiable.”
The US debt limit has been around for more than a century. Its purpose is to limit the amount which the US can borrow.
Since its introduction, it has been raised regularly and currently sits at roughly $34.1 trillion, around 120 percent higher than the country’s entire GDP.
The debt is owed not to one single person, but to institutions and people all around the world, only two-thirds of whom are inside the US.
Japan, China, and the UK are atop the list to which the US owes.
While numbers can be redone to buy more time, they can only buy so much, just like bailing water can only buy a sinking ship only so much time.
On the ramifications of a default, Goldman Sachs economists said: “It seems likely that uncertainty over the debt limit in 2023 could lead to substantial volatility in financial markets.
A failure to raise the debt limit in time would “pose a greater risk to government spending and ultimately to economic growth than it would to Treasury securities themselves”
.They also noted that consumer confidence at home and abroad would dip.
The United States is the kingpin of the world economy, with economic damage there having worldwide ramifications.
Famously, the 2008 financial crash began in the United States, but worldwide went very soon after.