America bankrupt? This is what the dollar says

Political stubbornness and outdated fiscal rules are a dangerous mix in the United States. If President Joe Biden plays his cards wrong, he runs the risk of bankrupting the country. Although…

Anyone who has taken out a mortgage in recent years knows that there is a limit to how much you can borrow. However, most countries do not suffer from this. However, the United States is an important exception. Since 1917, the country has had a debt ceiling that indicates how large the national debt can grow. That rule was included during a law change to make it easier to issue new loans to finance the war industry during the First World War. In recent decades, however, political parties have increasingly used the measure to clamp down on the opposing party.

Officials sent home
When the ceiling was hit two years ago, the government ran out of money to pay the bills. Overnight, on October 1, 2019, approximately 800.000 government employees found themselves at home. That could just happen again later this year. To raise the debt ceiling, a majority of 60 votes is required in the Senate. Republicans hold 50 of the 100 seats there. In the eyes of this party, public finances are being eroded by Democratic President Joe Biden's massive investments in healthcare, climate and infrastructure. They don't want to raise the debt threshold and thus cooperate with Biden's plans.

Opponents out of the game
While Republicans are willing to give Democrats more time to resolve the debt issue, a real solution is far from in sight. On paper, Biden has the ability to sideline his opponents and adjust the debt ceiling on his own. However, it seems that he will not use it. If he does, he'll give Republicans a powerful argument they can use to attack his financial policies. That's a dangerous move, given that next year's midterm elections threaten the tiny Democratic majority in the Senate.

Technically bankrupt
Treasury Secretary Janet Yellen has already warned that the country could enter a recession if the debt ceiling is hit and the United States can no longer meet its obligations. In that case, the country would even go technically bankrupt. Despite this very small risk, the dollar has risen against the euro to its highest level in over a year. Although this advance is mainly driven by rising inflation that increases the chance of an interest rate hike, the strength of the dollar can also partly be traced back to a safe haven in uncertain times. That is an indication that despite a possible delay, financial markets are not yet freed from the political sparring around the US debt ceiling.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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