America Debt Crisis: There is a danger of default on America, if this happens then what will be the effect on the world?

America Debt Crisis: America’s treasury is becoming empty and the country is in danger of default. The ruling Democratic Party wants to increase the loan limit, but the opposition Republican Party is obstructing it. Meanwhile, experts are warning that if America, considered the world’s biggest superpower, defaults, it could have a bad effect on the whole world. 

The world’s largest economy will default on its $31.4 trillion dollar debt if Democrats and Republicans do not agree to allow America to borrow more. They have to reach an agreement by June 1. President Joe Biden said last Wednesday he was confident the country would avoid an unprecedented and potentially catastrophic debt default, saying talks with Republicans have gone well. 

Government should cut spending

Default date is the day when the treasury will not have money to pay the bill. The default date is being told as June 1. The US Parliament will have to increase the debt limit to avoid default, but the Republican Party is not getting ready for it. Republicans say that the government should cut its spending. Although the US President has expressed hope of getting out of this crisis, but the big question is that if America defaults, how will it affect other countries.  

Fear of a recession like the 2008 financial crisis

If America defaults even for a week, then it can have a very bad effect. Bernard Yaros, assistant director of Moody’s Analytics, says that if this happens, there could be a recession like the 2008 financial crisis. After which the government may have to cut its expenditure. Yaros and many of Moody’s colleagues believe that the cuts will affect the economy and growth. 

And what effect?

In this situation there will be turmoil in the financial markets, interest rates will go up and the dollar will become weak. People can distance themselves from investment when interest rates rise. Yaros says that in such a situation, not only the US economy but the whole world will be affected. Together, many countries will not have as much trust in the American Treasury as they have now. The US currency dollar has remained a strong international currency for a long time, which will be challenged. The currency of other countries can take advantage of the weakness of the dollar and reduce its dominance in the market.

Moody’s has warned that in this situation the ratings of US financial institutions, non-financial corporations, municipalities, infrastructure providers will be downgraded. The rating of the institutions that get the support of the US government will decline. These institutions include Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. 

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