What is behind the risks of a possible debt crisis in the US?

Is it possible to unnecessarily generate a debt crisis in the US? Yes, potentially yes, and the effects on global financial markets could be very serious. Why does this threat exist? For two reasons. The first is the functioning of the budget process in the US Congress, which requires the Treasury to vote again even after the budget is approved to provide itself with the necessary funds, some via debt, to comply with the budget legislation. Second, the opportunism of some congressmen to use this particularity of the US budget process to promote their economic ideas, basically reducing spending on social security.

There are two misconceptions about this process. The first is that one of the parties seeks to control the debt and avoid an increase in it. The facts do not point in this direction. In President Trump’s term, debt increases were voted for three times, without any hiccups or threats, even though debt was increasing at a faster rate than in previous terms, largely because of debt cuts. taxes on corporations and the richest approved. If the debt was actually sought to be controlled, one way would be to eliminate these tax reductions, or to open a legislative discussion to find other ways to increase collection. The second misconception is that this threat stems from a lack of consensus between the two parties. The budget is already passed, raising the debt limit simply makes it possible for the government to comply with the law.

It is desirable that the reason for this threat be explained: the attempt by some to take advantage of a particularity of the budget law to try to reduce spending on social security. Some congressmen, aware that the programs they seek to reduce – pensions and Medicare – are very popular, even among their voters, try to divert attention and threaten a debt crisis, to pressure and indirectly reduce these programs, alluding that it is something inevitable to avoid a further increase in debt. The narrative that it is an effort by some congressmen to reduce spending and with it the debt is not only misleading, but dangerous because it perpetuates false ideas that repeat this process every time a group of congressmen does not have a member of their party in office. government.

What are the risks? If this process is extended, uncertainty will tend to increase. Nothing worries markets more than uncertainty. US Treasury Notes are the safe haven asset par excellence and also the benchmark for many other financial assets. The consequences of calling into question the ability of the US government to service the debt would be very serious. These assets are the most liquid in the financial markets. Causing a sudden and unnecessary loss in its price would have consequences in all corners of the world.

*The author is chief economist at BBVA Mexico