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    NewsUSAThe threat of debt in the United States

    The threat of debt in the United States

    Once again, as occurred in 1995, 2011 and 2013, uncertainty about whether the US Congress will increase the Federal Government’s borrowing limit is beginning to cause doubts in the markets, which could increase in the future. This is because a considerable number of Republican congressmen have said that, if significant spending cuts are not implemented, they will not give the authorization to increase said limit. Considering that party now has a majority in the lower house, this is a credible threat. The Secretary of the Treasury, Janet Yellen, estimates that, if it is unable to contract more debt, the US would default on its obligations, both financial debt and other mandatory payments.

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    The consequences would be dire. In addition to the effects on the well-being of the population that would stop receiving aid, the repercussions for international financial markets would be very negative. US treasury bonds are considered risk-free assets (it is a country that has never defaulted on its financial obligations, apart from having the power to issue the planet’s reserve currency), and they are the most liquid in the world. Therefore, they are the reference for valuing the vast majority of financial assets. Losing it would cause bouts of enormous global financial volatility and turmoil.

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    This problem stems from a serious institutional design flaw in US tax law. Congress approves, as in most countries, a spending budget and revenue estimate for every year. What should happen is that the Government would have to have the freedom to contract the debt required to be able to comply with this budget. However, in the United States there is an additional requirement: that Congress approve the increase in debt necessary to comply with the budget approved by the legislature the previous year. Thus, a procedure becomes an instrument of political pressure. And before the exercised by the Republicans, the Government is faced with a dilemma: either it fails to comply with an already approved budget or the debt limit.

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