Can America also default?

 

Can America also default?

  

Can America also default?

Hi friends! New York Wall Street has a big red billboard. It bears a large figure which is continuously updated. This figure is 31.4 trillion dollars... ...which is the US Federal debt. How huge is the amount of 31.4 plus trillion dollars? Presumably, excluding China, if it has been as good as the GDP... ...of the whole world...

...still would have been shade below it. America is all the time accruing its debts and how much it is increasing? How much is every citizen in America under the burden of debt? Many websites are showing details of all that. At the time of the making of this video... ...each American owed a debt of over 94,000 dollars.

Every year America instead of discharging the debt liability... ... is worried about adding to the debts. This process in America is called escalating the debt ceiling. That America spends over its income and in order to meet the difference... ... which is called deficit... ... which is met through more loans. By virtue of it, the loan jacks up every year.

By that account, America should go default any day. Yes, this is the threat and to avoid the default of America... ...crucial talks are held with the Opposition in Congress every year. So that the debt ceiling is enhanced and further loans are secured. If that does not happen, America will default...

...on its debts. Default on the debt means... ...not only America but the whole world... ...is up against the destruction. Because the maximum worldwide trade is carried out in dollars... More than 60 percent of foreign reserves around the globe... ...have been reserved in dollars. Euros and other currencies...

Can America also default?

...come much after it. So American default... ...is a virtual economic bomb for the world. Now the question is a rich superpower... ...why it is constantly going under a debt burden. Why it has come under the debt of more than 31 trillion dollars? Why before every budget it, for getting further loans....

..makes policies, rather is forced to do it? Through a simple story, we make you understand all this. And how it is a potential threat to the worldwide economy? You know in 1776... ...America, against its colonial master, British Kingdom ...had waged a war. But war is a costly business. It is not a cheap pastime. So,13 US states fought the British under the command of George Washington ... in order to meet the war expenses...

...took a number of steps. They printed currency notes... ...took loans from France, Netherlands, Spain, and the states hostile to Britain. ...imposed heavy taxes on newspapers and other legal papers. But despite all that war expenses were unmet. The American forefathers on July 4, 1776... ...had also pronounced the Declaration of Independence.

Which meant, not only war money was needed to run the country. The Americans fighting the war were to not get salaries from Britain... This new set-up has to pay them. Therefore in order to meet the war expenses... ...the American founders issued bonds. First of all, Liberty Bonds were issued. Now how do the bonds get the money? You know bonds were like receipts from a company or a country...

...and says to a recipient to take as much as he wishes in this 100 rupees... And do not demand the principal 100 rupees for 10 years... ...but he will get an annual profit of five rupees on each bond. And after 10 years he can get back his 100 rupees. And he will also own the annual five rupees profit.

The same paper receipt will be the currency bonds. Companies and state issue bonds when... ...when they are in dire need of money. The trust in the economy of a state or a company makes... ...the bonds to be sold out like a hot cake and... ...people also buy them at the minimum interest rates. Since these sold out bonds or receipts as per promise...

...command annual profit for the buyers... ...therefore a state or company which received money from buyers of bonds... ...invest the money to get maximum profit. But during the US War of Independence there was no question of business... ...and money was exclusively needed for war... So the money got through bonds was spent on war.

Americans bought bonds out of love for the new country and a spirit of sacrifice... And in return, the new American government as per promise continued... ...to pay them due profit. But how? By selling further bonds. There was no possibility of business. So, the American government printed more bonds and sold them every year.

...and paid the fixed interest to the bondholders. The war was also going on with the same money. From 1776 to 1783, for about 7 years, America fought Britain for independence. Eventually, a historic Paris Treaty was reached in France on September 3,1783. And the war ended. But by then the US was heavily in debt.

Both from foreign debts and in the form of bonds within the country. Even after the war, the U.S. Treasury continued to do the same... ...each time delivering the promised profits to the bondholders... ...and would borrow more to meet other needs. This apparent nonsense was however serving two purposes.

First, Americans and the world were certain the US would pay its debts. War or peace the American government does honour its financial commitments. It means trust in the US government was growing. Secondly, it was the debts piling up every year. In 1790 time came for the presentation of the first budget.

Can America also default?

In 1790, Alexander Hamilton presented the first US budget... which was a deficit budget. It had a budget of 4.5 million dollars. But the deficit was 1.4 million dollars. In the same way, the next year's budget was a deficit of one million dollars in it. The next budget also deficit of more than one million...

...and so every year something like this continued to happen. Alexander Hamilton, the first secretary of the Treasury, continued to... ...levy new taxes and borrow money instead of planning old debts retirement. This soon led to an interesting but painful situation. You know from our documentaries on American history that...

...America's War of Independence began with protests against taxes. Especially on tea tax. Taxes were abolished on the East India Company, but... ....tax collection from Americans, even without their political representation... ...was continued by Britain. So, enraged by their situation... ...the Americans started a protest which turned into a war of independence.

But now see that against what the freedom war was started... ...the same was done to make the freedom war successful. Taxes were levied for war even before Secretary of the Treasury Hamilton... ...and taxes were imposed to cover war losses even after the war. A good part of the American people continued was much furious over it.

Even when the tax was levied on whiskey... ... the farmers of Pennsylvania stood in revolt against it. This was America's first rebellion. They not only refused to pay taxes but also attacked the tax collector's office. The staff were not only beaten but also insulted through a procession in the city.

To crush this first rebellion, the "Whiskey Rebellion," George Washington sent a force and crushed the rebels with all his might. The whiskey tax remained the same. This event is both interesting and important in American history. That the country which had started the war of independence against taxation...

...fought and won the war by imposing taxes. Then levied so many taxes that they were much lower than the taxes levied by the Crown of Great Britain. But the difference must be kept in mind that that Americans rebellion against Britain in the War of Independence... ...had representation as an important issue when they were being taxed.

So when this rebellion was crushed... ...it resulted that every state and citizen of America... ...received the message... that the American federal government was strong ...and is fully capable of getting its orders implemented. For the first time, people realized they were citizens of a powerful country...

...a country capable of establishing the writ of within the country... ...and can also fight against external forces and win. Then the citizens were also getting the bond profits on time every year. So by this process, in the new country, the United States of America... ...a common American began to repose immense confidence.

So, guys, the point of this side story was that America spent every budget year in the beginning with tax upon tax and debt upon debt. This series was closed in 1802 by the third president "Thomas Jefferson". He abolished many taxes, including the whiskey tax, and, Alexander Hamilton, who was his political rival...

...his all policies were reversed. They had good policies, and it seemed... ...that America would now get out of the debt trap, but... ...how could it happen? Another war was staring in the face. In the year 1812, America again had to face Great Britain. Behind this war, the Western states, or the newly inducted states in America...

...was the reason as they had developed a complicated situation... ...which triggered this war. The accounts of which... ...you can watch it here. In this war America once again... ...was driven to new heaps of loans. After some decades, America began to stabilize and come out war with Britain... ...but America got into the historic civil war. The Civil War of the1960.

At the beginning of the Civil War in sixty-one, the United States... ...had a debt of 65 million dollars... ...at the end of the war next year, in 1866, this debt rose to 2.76 billion dollars, ...meaning two billion and 76 million dollars. Once again the same game of bonds and loans started. Until the early 20th century, the situation was that...

...the US government including for loans and expenditures... ...and for every act would seek separate approval from Congress. Which obviously was becoming a tiring job. But this process became very difficult till 1917. Meanwhile, the First World War began in 1914. In 1917, the United States also entered the war.

Now, like earlier, if for every act and loan... ...the Congress was to be moved for approval. In the war situation, it was as good as wasting time. So Congress came up with a solution. For the first time in 1917, the US Congress ...set a limit for the federal government... ... that how much you can borrow.

Then where to take from... ...why to take, where to spend... ...these details were mostly decided by the federal government. This process began to be called debt ceiling which means limit of the debt. From here the debt selling started ...which is now debated every year in the United States. At that time, debt selling was given by Congress...

...it was 27 billion dollars. So after Congress's approval, the United States in order to meet the war expenses... ...issued the second Liberty Bonds at a large scale and sold them out. Where to get loans from when other states were also in a shambles owing to the war. When the First World War ended in 1918...

...the debt burden on the American government began to decrease. In less than 20 years, the Second World War started and as the great recession. When the Japanese attacked Pearl Harbor in December 1941... ...the US also in response declared war against Germany and Japan. Again there was no one to lend money in the world...

...and war, you know, is a very expensive business. So once again Congress increased the debt ceiling. And to a surprise this time, the debt ceiling from 42 billion... ...jacked up to $258 billion. It was more than 500 percent. For this massive amount, a variety of bonds were issued. ...such as War Bonds...

...Victory Bonds and Treasury Bonds etc. As the war continued for three years... ...this limit was increased every year. Even when World War II ended in 1945... ...the American federal debt had reached $285 billion. So, friends, this series has come to this day. Today, the US debt has reached 31.4 trillion dollars.

A trillion dollars is made of one thousand billion dollars... So the debt ceiling from 1917 to date has been increased 100 times. But there was a little difference in the process after the debt ceiling of 1917... ... Congress then increased the debt ceiling easily due to war. But... ...after the war, every US government in order to escalate the debt ceiling...

...needed to have a tough dialogue with the Opposition. This also furnished an opportunity for the Opposition to get its demands accepted. The government was obliged to accept that if the debt ceiling... ...in not increased, the US may default. The threat also looms this year as the media is reporting.

In the event of a default, US bonds... ...which have the world's highest credit rating of AAA... ...will no longer be trusted by the world. But the Americans will not trust either. These ratings are issued by Moody's and several other credit rating agencies. The better the rating... ...the institution or the currency, or bonds whatever may be...

...attract equally higher investment as safe for return. Then the higher the confidence the lower the interest rate of return. For example, US bonds have the minimum interest rate.... ...for their profit is certain. There is no threat of their being sunk. And you also continue to get your annual profit.

And also get back your principal amount as per the settlement. For that matter, its rating is AAA (triple As). No fear, apprehensions, or threats bout them. But for America, the problem is... ...since the whole economy is running on debt... The month America runs out of cash... ...it needs approval to get more loans in any case.

And for that purpose credit ceiling is revised by Congress to enhance it. America confronted the same situation this year too. When the Secretary of Treasury wrote to the Speaker that... ...by June 1, 2023, they could reach a situation where cash is exhausted. And if that happens and the debt ceiling remains the same...

...America will go default. This means that the US bondholders will not get the agreed profit in June... ...and salaries, pensions, health facilities, etc. to all institutions including the army... ... will not be paid in time. Trust in America will be jeopardized. Guys the game took place this year...

...repeats almost every year or after some interval in America. Like always Congress does increase the debt ceiling after a painful debate. ...and America again gets loans over and above its income... It is about 123 percent of the present GDP ratio. That is, the entire US economy, and most of the world's economy...

...is based on the assumption... that the US government will get the debt ceiling increased from Congress. Meaning the global business is running under the Damocles sword of US debt. But what will happen if the date selling does not increase in a year? Will the US default? Yes absolutely will. And if there is a default, then the whole world's economy will tremble...

...because the world's trust in the dollar will begin to shake. And there is currently no alternative to it. 60 percent of the world's foreign reserves, which are in US dollars, will... ...lose value to cause a worldwide depression. There will be problems for many countries and if... ...you think it won't create a problem for China...

...then let me tell you that China will be affected the most. Because it has 3.4 trillion dollars, the largest reserves in the world. Japan and Switzerland also have reserves of more than a trillion dollars each. So it will be a problem for all if the dollar devalues. So, friends, if America goes default...

...is such a huge threat. Then what options does the US have to avoid default every year? The first is, that the ruling party in Congress reaches an agreement with its opponent... ...and increases the debt ceiling. So that America could pass another year borrowing more. For it, the US government will have to accept many things from the Republicans.

The top of which may be a demand the government to cut spending. For which the US currently is in a fix as to where spending should be slashed. If Joe Biden accepts the Republicans' condition to raise the debt ceiling... ...his value in the party as a good leader will be weakened... ...he will succumb to blackmailing under pressure.

Next time, the party may not nominate him for the presidential slot. So he cannot afford it. Or it seems that he is under pressure. So what is the other option given it? The second is, that the government temporarily suspends the debt ceiling debating it. And would slightly increase the level of the debt ceiling itself.

After that, convince Congress to set a limit on the debt ceiling. This way the US could avoid default. However, it carried the difficulty that it might create uncertainty in the US market. America's credit rating will also be affected. How much will be? No answer to it.

If there is a delay, what will be its effect on the economy? This has never happened so far... ...so no one wants to use this option. Maybe nothing will happen... ...and maybe the value of the dollar will be very low all over the world. So there is a third option. That, Democrats get a majority vote in the House. That is, by wooing the Republicans to their side... ...and taking them to vote for the debt ceiling they set.

This is also a way to save the US from default, but the difficulty is... ...it requires at least 5 votes of the opposition, which is a very difficult task. Then the fear is also that the Republicans will do the same politics? And the US default would become even more certain. So the third option is difficult and can not be exercised.

After all this situation, one last option is left. that the US government resorts to the 14th Amendment of the Constitution... ...and set a date to fulfill its obligations... ... honor all interests and contracts including bonds. It means whoever has to be paid, must be done on time. Whether by printing notes borrowing or issuing bonds.

Because according to the 14th Amendment... ...the United States as a state has to fulfil its contracts in any case. And meeting the contractual obligation, i.e. for paying the due... ...is not something that requires the approval of Congress. Because those who have bought the bonds... ...will be waiting for the two to three percent profit this month.

If they do not get the interest on the due date... ...then where would the state contract state? America has to face this whole scenario almost every year. This year too, everyone feels, although at the last moment... ...a consensus will be reached in America. The debt ceiling will be raised... ...and the US will avoid a debt default this year as well.

But, for how long? Who will pay the debt of 31.4 trillion dollars? You know, the dollar economy of the whole world stands on a fantasy. A lie backed by a belief... ...that the US will pay off its debt although by borrowing more... So whatever appears is only a bubble... ...that could burst at any moment. Only hope, trust, and desire to find a better tomorrow...

...on which the US economic system and of the whole world stands. If America is going with 123 percent debt to GDP... ...Japan's is 260 percent. Japan is 260 percent in debt. Similar problems in different ways... ...also exist in other rich countries. So who is actually the rich country? Where exactly is all the real currency...

...on which the numbers of banks all over the world go up and down? To be honest... ...everything is an illusion... ...an expanding and contracting shadow. What we lost and gained in this love affair... ...what you said... and what Faiz (the poet) said... ...everything is a mirage. We tried to explain the world story of the US economy in simple words.