US impact of default on debt on rising interest rates

US impact of default on debt on rising interest rates

US debt that has reached a threshold has the potential to push the US to the brink of recession. The US, which is being 'haunted' by US debt defaults next June, is in a period of difficulty obtaining funding, considering that the US has already reached its debt ceiling of US$ 31.4 trillion.

US government debt or commonly called US Treasuries is one of the most influential assets in the world. Assets that are commonly referred to as risk free are actually subject to default and will 'detonate a bomb' in the global financial system.

Director of the Center of Economic and Law Studies (Celios), Bhima Yudhistira said, debt problems would risk triggering a global systemic crisis after the pandemic. The debt risk situation also needs to be looked at. For Indonesia, the current portion of debt is more than 89 percent in the form of SBN, which means it depends on market interest.

Read more in the article "The United States is Threatened with Default in Debt Payments, What about RI?"

The US government must immediately abandon its political infighting to focus on improving the economy. This is because the potential for default on US debt will have a domino effect on the global economy.


Image Money(Dollar) and Gold


Global trade decline


source:istock | Market and Money Illustrations


Defaultsor default on US debt will push it toward the brink of recession. The level of US consumption will drop, imports will decrease, so that countries that rely on their economy through exports to the US market will be hit.

This blow is compounded by the potential devaluation of the US Dollar. The weakening US dollar value will reduce interest in imports due to a decrease in the value of the currency.

Launching Refinitiv, US, Imports Prices on an annual basis have shown a decline in the last few months. April 2023 was the lowest decline in US imports reaching -4.8%.

 

The Dollar Suffers

The US dollar is a currency that is often used in international transactions. In addition, many countries use their local currency as a reference to keep the value stable.

Developing countries that do not yet have a credible currency will be particularly affected. A decrease in the value of the dollar will make countries that refer to that currency receive losses.

Affected Business Contracts

Many transactions in various parts of the world require the use of dollars with the aim of preventing losses to one party due to currency changes.

A sudden and sharp drop in the value of the dollar will cause payments to be received less than they should be.

US cash outflows

America as the center of the economy is of course the world's interest in investing in the country. When the US economy grew strong, investors looked for opportunities through the stock market. Meanwhile, the economic slowdown will lead to US Treasuries.

However, the economic turmoil accompanied by political seasoning has caused the potential for the US government to default on its debt due to refusing to pay off the debt ceiling.

Investors will be worried about putting their funds in the US market, so that investment will go to other countries with non-US dollar denominated currencies.

 

  Foreign Reserves in the New Currency

Investors starting to leave the US market and move to other countries will threaten the stability of the dollar. Reserve currency is the money a country's central bank holds to facilitate global trade, meet debt obligations, and influence the value of its domestic currency.

Since the end of the 2nd world war, the dollar has become the main global reserve currency in various countries. This causes a constant global demand for dollars and allows the US government to borrow at lower interest rates.

The United States' global competitors, including China and Russia, have for years advised diversifying in reserve currencies, such as the Euro or Renminbi.

the Euro or Renminbi.

 

Impact on the global economyCentral Banks Risk Losing Confidence If They Can't Tame Inflation

Central banks risk losing public confidence if they fail to reduce the high inflation rates found throughout developed countries. Agustín Carstens, director of the Bank of International Settlements, said central bankers need to maintain a tough stance on inflation or risk a new generation of consumers who have never experienced price increases fast losing faith in their independent role.


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