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Impasse in the US on debt ceiling

If the US defaults on its debt, it will significantly diminish the dominance of the dollar in the global financial landscape

As US President Joe Biden prepares to reengage in negotiations with House Speaker Kevin McCarthy and other influential Republicans on the critical issue of the debt ceiling to find common ground amidst a landscape riddled with challenges, constitutional experts warn of the potential ramifications should the they fail to forge an agreement on this matter.

The stakes are high. Inaction or an impasse in these deliberations would catapult the United States perilously close to defaulting on its debt obligations. Such a scenario, once unthinkable, would have far-reaching consequences, reverberating across financial markets worldwide and threatening to upend the delicate balance of the global economic order.

The intricate negotiations carry profound implications for the US and the world. The outcome will determine whether the United States treads a path of fiscal responsibility or inches closer to the precipice of a potential default. President Biden's leadership and the engagement of Speaker McCarthy and other congressional leaders will be pivotal in charting a course forward that avoids the impending danger.

The eyes of the world are fixed on this crucial juncture, cognizant of the potential reverberations that could ensue from a failure to reach a consensus. Their ability to rise above political divides and find common ground will determine not only the economic fate of the United States but also its standing on the global stage. The world awaits the outcome with bated breath, hopeful for a resolution that will avert financial calamity and reaffirm the strength and resilience of America's democratic institutions. If the US defaults on its debt, it will significantly diminish the dominance of the dollar in the global financial landscape and weaken the country's ability to shape international affairs.

Adding to Washington's woes, the unresolved banking crisis and the intensifying bipartisan struggle over the debt ceiling further exacerbate the situation, with small and medium-sized banks facing a potential "death spiral" and a subsequent economic slowdown.

As the world's largest economy that leverages the strength of the dollar, the economic problems plaguing the United States could have negative ramifications for other countries. Could a US debt default unleash a "financial atomic bomb"?

In the United States, in the last few years, an atypical pattern has emerged, where the two major political parties engage in high-stakes brinkmanship when it comes to the debt ceiling. What was once a procedural formality has now evolved into a formidable challenge, as bipartisan agreement on this critical matter becomes increasingly elusive with each passing year.

The debt ceiling, once a routine legislative procedure, has now morphed into a battleground for partisan disputes and ideological clashes. Gone are the days when raising the debt ceiling was viewed as a “routine” step to ensure the continued functioning of the government and the fulfillment of its financial obligations.

President Joe Biden and Democrats in Congress have been pushing for increase in the government's borrowing limit of $31.4 trillion without any conditions since the start of the year. However, Republicans, who hold a slim majority in the House of Representatives, insist on establishing new spending limits for the future before approving further payments to cover previously authorised expenditures.

The Republican Party has adopted a relatively atypical strategy, driven by a conviction that the current trajectory will inevitably result in economic and societal devastation. For many Republicans, this approach is seen as a necessary measure to create a potential crisis for President Biden and Democrats.

These divergent perspectives on the debt limit reflect deeper ideological divisions between the two parties, shaping their respective approaches to fiscal responsibility and the role of government in society. This heightened level of polarisation and gridlock has cast a shadow of doubt over the ability of Congress to effectively address the country's fiscal challenges. Additionally, the prevalence of dollar denominations in international trade facilitates a significant concentration of power in the hands of the US government. This is exemplified by the utilisation of dollar-denominated sanctions as a political tool against other nations.

In the intricate dance of political negotiations, the urgency surrounding the debt ceiling looms large, casting a shadow of uncertainty over the American economic future. According to the astute projections of Moody's Analytics, the consequences of prolonged discord between the two parties could be severe: stock prices will fall by nearly one-fifth, the economy will shrink by more than 4 per cent, and more than 7 million jobs will be lost in the wake of this fiscal impasse.

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