Doubts surface over US debt ceiling bill

Despite President Joe Biden touting the bipartisan agreement on the debt ceiling as "a big win" for the country, global concerns about the risks of the United States' economy have only intensified.

The risks of the US economy have not only failed to dissipate, but have even increased in some areas.

Market analysts anticipate that the cash-strapped US Treasury Department may start massive borrowing, unleashing a "tsunami" of new bonds, which could lead to a drain in market liquidity.

Data from the Treasury showed that as of June 1, the Treasury's cash balance has fallen below $23 billion. After the debt-cap resolution, the Treasury Department is expected to replenish its cash balance to $550 billion by the end of this month. Market participants anticipate the Treasury's debt issuance in the coming months could exceed $1 trillion.

"This is a very big liquidity drain. We have rarely seen something like that. It's only in severe crashes like the Lehman crisis where you see something like that contraction," JPMorgan strategist Nikolaos Panigirtzoglou was quoted by Bloomberg as saying.

A deluge is likely to suck a significant amount of liquidity out of financial markets, Bloomberg commented, adding that it could add pressure to a financial system still showing signs of strain after several banks collapsed with the Federal Reserve raising interest rates and shrinking its balance sheet.

What's more, the debt ceiling bill also restricts federal spending for the fiscal years 2024 and 2025. Market participants believe that the US economy has been weighed down by various unfavorable factors in recent quarters, with growth barely sustained by federal expenditures, so the bill's restrictions on spending may dampen this supportive factor.

Larger impact

"Fiscal multipliers tend to be higher in a recession, so if we were to enter a downturn, then the reduced fiscal spending could have a larger impact on GDP and employment," Michael Feroli, chief US economist at JPMorgan, told Bloomberg.

In addition to increasing financial risks and weakening growth momentum in the short term, the debt ceiling bill, in the long run, fails to substantively address the long-standing institutional flaws in the US economy regarding debt issues.

Two key fiscal issues related to the US debt — welfare spending and tax revenue — were not significantly addressed in the bill, analysts said.

Democrats are concerned that pushing for tax increases will hurt their election prospects, while Republicans fear forcing Democrats to cut welfare spending will result in an angry backlash.

The two parties agreed to restrict spending for the fiscal years 2024 and 2025 in exchange for suspending the debt ceiling until January 2025, which coincides with the assumption of office by the next president and the induction of some members of Congress, effectively passing the "old account" to "new officials".

The periodic US debt crisis typically features the Republicans and Democrats bickering for their self-interests, which causes concerns and unease in markets, said Wichai Kinchong Choi, senior vice-president of leading Thai bank Kasikornbank.

"It's clear that the intense partisanship is increasingly politicizing the issue," he said.

Choi said raising the debt limit is but a short-term fix. The root cause lies in the severe US fiscal imbalance and budget deficit coupled with the reliance on the US dollar hegemony to implement ultraloose monetary policies in the face of economic crises.

Dollar hegemony

He opined that the US debt crisis further exposes the harm of dollar hegemony. In recent years, many businesses in countries like Thailand have begun to adopt "de-dollarization" methods in international trade due to the fluctuations of the greenback, the slump in the US economy as well as potential political risk.

The weaponization of the dollar has compelled countries to seek a reduction in their dependence on the currency and establish a financial settlement system that is efficient, low-risk, and not subjected to the whims of the US financial system, Choi added.

Xinhua