Causes Of The United States Threatened To Default And What Are The Impacts For Indonesia?

Illustration (Photo: Doc. Antara)

JAKARTA - The United States Congress is desperately trying to increase the country's debt limit. Because if not, the country is threatened with default or the first default in history. What really happened to the superpower? And what are the implications for Indonesia?

Secretary of the Treasury of the United States (US) Janet Yellen called out to Congress. He said that if this economic crisis does not find a bright spot, it is almost certain that a disaster will hit Uncle Sam's country in less than three weeks.

Therefore he asked Congress to take serious steps to raise the debt limit before October 18th. Otherwise, the US is threatened with default or the first default in history.

"We now estimate that the Treasury is likely to run out of extraordinary measures if Congress doesn't act to raise or suspend the debt limit by October 18," Yellen said.

Yellen revealed the threats that could occur if this debt limit was not raised. "You could see a spike in interest rates if the debt ceiling wasn't raised. I think there will be a financial crisis and disaster."

The debt ceiling or debt limit is the main problem in this commotion. And the suspension of the US debt limit has just ended. Even though the government admits that it will no longer be able to pay all of its debt obligations as of next October. So what exactly is a debt limit?

Illustration. (Photo: Unsplash)

Debt limit problem

As Detik summarizes, the debt limit is simply the maximum amount of money the US Treasury can borrow in the form of bond sales. The money from this debt will then be used to pay a number of financial obligations each month. Starting from social security, US Medicare health insurance payments, and other programs such as tax returns.

If the debt has reached the limit, without congressional approval, the Ministry of Finance cannot owe anymore, as a result the US government cannot pay its obligations, aka default. Moreover, debt is needed because the US government currently spends more money than tax receipts.

The US debt limit itself has increased periodically since it was first introduced in 1917. Then since 1960, the debt ceiling has been raised or suspended 78 times.

The US Congressional Budget Office estimated in July the debt limit would need to be raised from $22 trillion to $28.5 trillion. Meanwhile, the US Ministry of Finance said that failing to raise the ceiling, and consequently allowing the government to fail to pay its obligations, would have major economic consequences. So what triggered the real US economic shock?

Director of the Center of Economic and Law Studies (CELIOS) Bhima Yudhistira explained the biggest factor triggering the US default. He said there were at least three factors causing the US economic crisis.

First, the problem of fat US military spending. Second, there are many tax incentive programs, especially in the era of President George Bush and President Donald Trump. Finally, because of social security programs and large health spending.

"The military spending is too fat, giving a lot of tax incentives, especially in the Bush and Trump era. Then the social security program and health spending are also large," Bhima told VOI.

US Treasury Secretary Janet Yellen (Source: CoinDesk)

Impact on Indonesia

Economist from Moody's Analytics, Mark Zandi explained the impact of the impasse of increasing the US debt ceiling. According to him, as quoted by The Post, the impact of the crisis will at least cost Uncle Sam's economy up to 6 million workers, wipe out household wealth as much as 15 trillion US dollars, and raise the unemployment rate to around 9 percent from 5 percent.

Regarding the fuss in the US congress, lawmakers from both parties have actually agreed that the debt ceiling should be raised to avoid an economic disaster. However, the discussion stalled when the congress discussed how to do it. Republicans have insisted on refusing to help Democrats raise the debt ceiling, against President Joe Biden's spending plans.

Failure to increase the debt limit will bring havoc to global financial markets. Interest rates will soar as investors demand higher returns as uncertainty about payments increases.

An increase in interest rates will also increase costs for taxpayers, consumers and creditors. And for sure, the value of the US dollar will also decline in the long term. Meanwhile, the cost of car and home loans in the US will increase. So what is the impact on Indonesia?

If the US congress persists in refusing to support increasing or suspending the debt ceiling, the US government will not be able to pay civil servants salaries, send money to retirees, or pay off the national debt. Automatically because of this, it is not impossible that the US government will close or shutdown.

Economist Bhima Yudhistira explained that if this happened, the impact would be felt on the Indonesian economy. But not significant. "If there is a relatively small impact on the Indonesian economy."

One of the two impacts felt for Indonesia is from the export and financial sectors. "Because this government shutdown will affect the performance of exports to the US. But certain exports. Then it will also increase the risk to the financial sector." Bhima said.

However, according to Bhima, these risks are unlikely to occur. "Because the US government is still trying to consolidate politically so that we hope this government shutdown will not happen. Or if it happens it won't last too long. So actually we don't need to worry too much," he concluded.

*Read other information about DEBT or read other interesting articles from Ramdan Febrian Arifin.

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