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The threat of default due to the ceiling of the US national debt



Investors in the stock and cryptocurrency markets are closely monitoring the development of the situation in connection with the threat of a technical default in the United States due to the achievement of the public debt ceiling.

US President Joe Biden called the catastrophic threat of reaching the ceiling of the US national debt, in which the country will not be able to meet its debt obligations. However, speaking to reporters on Wednesday, President Biden said he was confident that he would be able to negotiate with the Republican Party to raise the national debt ceiling and prevent a default in the United States. Speaker of the House of Representatives of the Congress Kevin McCarthy (Republican from California) believes that by the end of this week it is possible to reach agreements on raising the debt ceiling in the US in order to prevent default.

In this article, we will analyze such concepts as the US national debt, technical default and how its threat affects the stock and cryptocurrency markets.



What is the US government debt?

The US government debt is the total amount of all debt that the US federal government has taken on through the issuance of bonds, treasury bills, and other forms of government credit. These funds are used to fund a variety of government spending and obligations, including everything from social security and medical care to military spending and infrastructure.


According to the US Constitution, only Congress can set a national debt limit, which determines the maximum amount that the government can borrow. If this limit is reached, Congress must either increase it or the government must cut its spending.


It is important to understand that although the size of the US national debt seems astronomical (trillions of dollars), it is not unusual for a large economy. Most countries have a significant public debt, and its size is usually measured relative to the size of the country's economy, or GDP. Both debt and a country's GDP are measured in dollars, making it easy to compare them to each other.


Despite the high level of debt, the US continues to successfully service its debt, as it has a stable economy and the US dollar is the world's main reserve currency.



What is the top of the US debt?


The US debt ceiling is a statutory limit on the total amount of money that the US federal government can borrow by issuing bonds.


The debt ceiling was introduced in 1917 to make it easier to manage the state's finances during the First World War. Since then, Congress has repeatedly raised and temporarily suspended this ceiling as the government constantly takes on new commitments.


If the debt ceiling is reached and not increased or temporarily suspended, the US government may find itself in a situation where it will have to significantly reduce its current spending, as it will no longer be able to borrow money to finance its obligations. This could lead to serious economic consequences, including a potential default on government obligations.


It is important to understand that raising the debt ceiling does not mean more spending or more borrowing; it simply allows the government to meet its obligations that have already been approved by Congress.



What awaits the US economy if the national debt top is reached, if it is not raised?


If the debt ceiling is reached and Congress does not raise it, the US federal government will be forced to cut or stop certain spending altogether to avoid exceeding the ceiling. This could affect a wide range of federal programs and services.


If the situation worsens and the government is no longer able to pay its debt obligations, this could lead to a technical default on the public debt. This event could have a major impact on financial markets as US government bonds are considered one of the safest investment vehicles in the world and are an important component of many investment portfolios.


In the long run, a default could raise borrowing costs for the US government as investors may demand higher interest rates in exchange for risk.


It is also worth mentioning that even the threat of default can hit the economy. For example, in 2011, when Congress was fighting the issue of raising the national debt ceiling, Standard & Poor's rating agency downgraded the US credit rating, which led to turmoil in financial markets.


For this reason, the issue of the debt ceiling is often the subject of political discussion and scrutiny from the financial markets.



What is a technical default?

A technical default usually occurs when a borrower fails to meet one or more terms of its loan agreement that are not directly related to principal and interest payments. This may include, for example, breach of covenants (loan agreement terms) or financial reporting deadlines.


In the context of public debt, a technical default could occur if the government failed to meet some of its financial obligations, such as paying pensions or benefits, or paying contracts with suppliers, even if it continues to pay interest on its debt and repay it on time. This can happen if the debt ceiling is reached and not raised, and the government has to choose which bills to pay with limited financial resources.


In any case, a technical default may adversely affect the reputation of the borrower and the terms of its further loan. However, the consequences of a technical default may be less severe than a full default where the borrower fails to pay interest or repay the principal.



What will happen to the purchasing power of the dollar in the event of a technical default in the US?

If a technical default occurs in the US, there could be various implications for the purchasing power of the dollar.


Decreased Confidence in the Dollar: A technical default could undermine confidence in the dollar as the world's reserve currency. If investors begin to doubt the US's ability to service its debt, they may reconsider their willingness to hold dollar-denominated assets. This could weaken the demand for the dollar and depreciate it against other currencies, which in turn could reduce the purchasing power of the dollar in international markets.


Inflation: Depending on how the government reacts to the default, inflation may increase. For example, if the authorities decide to print more money to cover the budget deficit, this can lead to higher inflation, which also reduces the purchasing power of the dollar.


However, it is worth remembering that many factors affect the purchasing power of the dollar, including economic policy, trade relations, the level of interest rates, and many others. This makes predicting the exact impact of a technical default on the purchasing power of the dollar a difficult task.



What impact does the threat of a US technical default have on the stock market?

The threat of a technical default in the US could cause significant instability and volatility in the stock markets. This is due to several factors:


Multiple Levels of Uncertainty: Uncertainty about which commitments the government will be able to meet and which it won't can lead to uncertainty about specific companies and industries that may be affected. Such uncertainty can cause panic in the markets and a general decline in share prices.


Impact on confidence: US government bonds are considered the safest in the world, and any problems with their payment could undermine investor confidence in other assets, including stocks.


Macroeconomic impact: Public debt problems can exacerbate economic problems by cutting government spending and/or raising taxes. This could slow economic growth and hurt corporate profitability, which in turn could drive down share prices.


All this does not mean that the threat of a technical default will necessarily lead to a crash in the stock market, but it can cause significant volatility and make investors more cautious.



What impact will the threat of a US technical default have on the cryptocurrency market?

The threat of a technical default in the US could have a significant impact on the cryptocurrency market, but it can be difficult to determine exactly which one, due to the uncertainty and high volatility of this market.


Here are some possible scenarios:


Growth of investment in cryptocurrencies as a "safe haven": US default may provoke a flow of assets into the crypto industry. If investors begin to question the safety of traditional assets such as government bonds, they may start looking for alternatives. Some may view cryptocurrencies like Bitcoin as "gold 2.0" and redirect some of their investment there, which could drive the price of cryptocurrencies up.


Increased volatility: Also, the threat of default can increase volatility in the cryptocurrency markets. In a situation of uncertainty, investors can be more unpredictable in their actions, which can lead to greater price fluctuations.


Decreased confidence in digital assets: On the other hand, if economic problems worsen, investors may become more conservative and prefer to avoid risky assets, including cryptocurrencies. This can lead to lower prices for cryptocurrencies.


The stablecoin market may face a serious crisis. The issuer of the USDT stablecoin, Tether, has rapidly withdrawn capital from bank deposits, fearing trouble for the American economy. Beginning in May, the issuer of USDT Tether will allocate up to 15% of net realized operating income to buying Bitcoin, in addition to the stablecoin's underlying reserves.

Circle, the issuer of USDC, the second largest stablecoin by market capitalization, has withdrawn 30% of its reserves for securities transactions amid the possibility of a US default.


The following risks must be taken into account: A significant correction is not ruled out before the growth of the bitcoin rate. It is not necessary to completely exclude the correlation of the crypto-currency market with the traditional stock market, the stablecoin crisis may worsen the overall situation of the crypto-industry.

It is important to remember that the cryptocurrency market is relatively new and very volatile, and its reaction to macroeconomic events can be unpredictable. Investors should always carefully examine their investments and understand the risks associated with investing in cryptocurrencies.

It is important to remember that the cryptocurrency market is relatively new and very volatile, and its reaction to macroeconomic events can be unpredictable. Investors should always carefully examine their investments and understand the risks associated with investing in cryptocurrencies.

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