Washington, June 3, 2023 (Saturday) – U.S. President Joe Biden signed an agreement to temporarily suspend the U.S. government’s debt ceiling at $31.4 trillion (Hunnicutt, 2023). This critical move was made to avoid an unprecedented default, with two days remaining on the countdown.
According to BBC.com, the debt ceiling raise proposal successfully passed through the House of Representatives and the Senate earlier in the week, paving the way for President Joe Biden to sign the agreement. As a result, the federal government is now authorized to borrow funds until January 2025.
Previously, the U.S. Congress has implemented numerous modifications or temporary suspensions to the long-standing agreement established under the Second Liberty Bond Act of 1917. According to the U.S. Department of the Treasury, there have been a total of 78 instances since 1960 where the U.S. debt ceiling agreement has been raised, extended, or revised. Among these, 49 adjustments occurred during Republican presidencies, while 29 occurred during Democratic presidencies.
The debt ceiling issue serves not only to avert the risk of default but also reflects the complex dynamics of the U.S. political landscape, where it is used to advance budgetary agendas and navigate negotiations between Congress and the White House. The decision to raise or suspend the debt ceiling involves intricate discussions and debates among policymakers, with differing priorities and political considerations. These divergent perspectives and ideologies highlight how the debt ceiling is not solely a financial matter but also a reflection of the intricate balance of power and competing interests within the U.S. political system.
Despite the political dynamics at play, U.S. officials were aware that they had to take steps to raise the debt ceiling to avoid default (Elving, 2023). Doing so holds significance in guaranteeing that the U.S. government can meet critical financial responsibilities such as compensating federal employees, military personnel, social security beneficiaries, medicare recipients, and meeting obligations related to the national debt and tax refunds. Modifications or suspensions made to the debt ceiling agreement provide the required flexibility for the government to fulfill its financial obligations effectively.
Raising the U.S. debt ceiling agreement is critical for the U.S. economy. Without an increase, the U.S. government would face default, which would substantially impact the global market. As reported by APnews.com, many experts believe that if the US were to experience a recession due to default, the world economy would suffer, along with a decline in the value of the U.S. dollar. Chief economist at Moody’s Analytics, Mark Zandi, highlighted that “No corner of the global economy will be spared” in such a scenario (Wiseman, 2023).
Increasing the U.S. debt ceiling has significant positive implications that revolve around the concepts of “stability” and “commitment.” These implications extend beyond the U.S. economy to the global market, including ASEAN countries, mainly due to the interconnected financial systems worldwide. Because the U.S. dollar holds a dominant position as a global currency and is extensively used in foreign exchange reserves, it amplifies the impact of decisions related to the debt ceiling.
Moreover, investors widely regard the U.S. Treasury securities as a “safe investment” with Triple-A rating due to their high creditworthiness and reliability in meeting their financial obligations (Smith, 2023). When the U.S. debt ceiling is raised, it signifies the government’s ability to secure additional funds and fulfill its financial obligations. This assurance contributes to the perception of U.S. treasury activities as secure investments, instilling confidence in investors.
The stability achieved by raising the U.S. debt ceiling benefits the global market by promoting a more predictable and secure financial environment and encouraging investment, trade, and capital flows. Additionally, the U.S. government’s reliability in honouring its debts will make U.S. Treasury securities an attractive option for investors seeking a secure and stable investment avenue. The interconnectedness of financial systems and the prominent role of the U.S. dollar further enhance the impact of raising the U.S. debt ceiling on the global market, reinforcing the significance of this decision for ASEAN countries and other participants in the international financial system.
Given that the US is a significant foreign direct investment (FDI) source in ASEAN countries (ASEAN Organization, n.d.), an increase in the debt ceiling also stimulates economic growth within the region. This growth not only fosters a more predictable and secure financial environment but also reduces the likelihood of adverse spillover effects on ASEAN’s financial markets and economies. The stability derived from raising the U.S. debt ceiling provides the global market, including ASEAN countries, with a more favorable setting for trade, investment, and capital flows.
Expectedly, the absence of an increase in the debt ceiling creates a state of instability and uncertainty, particularly within the global financial system. When the U.S. government is unable to meet its financial obligations and defaults, investor confidence diminishes, and risk perception escalates. In a letter addressed to Congress in January 2023, Treasury Secretary and former Federal Reserve Chair Janet Yellen emphasized the detrimental consequences of failing to meet the government’s obligations, stating that it would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability (Campbell et al., 2023).
Consequently, investors may become more cautious and risk-averse, perceiving the U.S. government as less financially secure and reliable. This lack of confidence, coupled with the potential decrease in the value of the U.S. dollar, can lead to reduced capital inflows from global investors. Given the interconnectedness of financial systems, ASEAN countries and other global markets may experience spillover effects, including financial market linkages, trade dependencies, investor sentiment, and a decline in foreign direct investment (Stocker et al., 2017). These repercussions can further hinder the economic growth prospects of ASEAN countries, exacerbating the negative impact of the failure to raise the debt ceiling.
Whether successful or not, the impact of the U.S. debt ceiling agreement is pivotal in shaping the stability of the global market, including ASEAN countries. Successful implementation of the debt ceiling increase yields far-reaching benefits for global economies. It strengthens the perception of U.S. Treasury activities as secure investments, fostering investor confidence and economic growth within ASEAN. This, in turn, mitigates spillover risks, fostering a stable and secure financial environment for trade, investment, and capital flows.
Failure to raise the U.S. debt ceiling sends a clear message of the U.S. government’s inability to secure additional funds for fulfilling its financial obligations. This lack of stability and commitment significantly impacts the global market. It engenders heightened uncertainty, undermines investor confidence, diminishes capital flows, and obstructs economic growth prospects. Therefore, prioritizing raising the debt ceiling is paramount for the U.S. government to mitigate these negative consequences and ensure a stable and secure financial environment for all stakeholders involved.