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The black swan and the US public debt ceiling

May 16,2023 - Last updated at May 16,2023

The term "black swan" has resurfaced in specialised economic programmes and news bulletins. So, what does this term actually mean? There are various stories surrounding this peculiar swan. For instance, one story tells of a duck that hatched seven eggs, from which beautiful chicks emerged, except for one egg that remained unhatched. This delayed hatchling was looked down upon by the other chicks and became subject to their ridicule. No one wanted to play with it. This constant rejection greatly shook its self-confidence, leading it to feel lonely. When winter arrived, the swan faced harsh conditions of homelessness. However, come spring, it was astonished to discover that it had transformed into a beautiful pelican with shiny white feathers.

Another story behind the expression "black swan" dates back to the European Middle Ages when people believed that all swans were white and that black swans did not exist. However, in the seventeenth century, black swans were discovered in Australia. From then on, the term "black swan" came to signify that the seemingly impossible could indeed occur.

The third story involves a Lebanese citizen named Nassim Nicholas, who further developed the concept of the black swan theory. According to his theory, major historical events are often triggered by sudden and unexpected occurrences. Examples include the discovery of personal computers, the Internet, World War I, the September 11 attacks, and the bursting of real estate and financial bubbles in the United States in 2008. We can also add events like the Arab Spring, which ignited after Bouazizi's self-immolation in Tunisia, caused by his mistreatment by a Tunisian policewoman, as well as the outbreak of the COVID-19 pandemic resulting from a dangerous virus, among others. Nassim Nicholas initiated the development of the black swan theory, which emphasises the need to anticipate the unexpected in the field of economics. What can we expect from seemingly impossible events?

One of the most significant events currently being debated fiercely in the United States is the issue of the debt ceiling and the potential consequences if the US defaults on its debt. What does the term "debt ceiling" mean, and what would be the implications of a US default?

The US public debt ceiling refers to the maximum amount that the US government can borrow to fulfill its financial obligations outlined in the budget, such as payments for Social Security and Medicare. As the United States spends more than it generates in revenue, it resorts to borrowing. To borrow, the US Treasury issues securities like government bonds, which are eventually repaid with interest. However, once the government reaches the maximum borrowing limit, the Treasury can no longer issue additional bonds, necessitating an increase in the debt ceiling. The responsibility for raising the debt ceiling lies with Congress, and it has now reached $31.4 trillion.

Typically, a significant portion of the US Treasury's funds are allocated to support spending programmes such as Social Security and Medicare, accounting for nearly half of the total annual budget. Military expenditures then comprise a significant portion of the remaining funds.

A default by the United States would create difficulties and problems affecting all parts of the world. However, US President Biden has emphasised that defaulting is not an option. The US Treasury Department has already informed Congress about the initiation of "extraordinary measures" due to the rise in the debt ceiling, which has reached $31.4 trillion. Treasury Secretary Janet Yellen has warned that if a decision is not made to raise the debt ceiling by June 1, 2023, the government will be unable to meet all its obligations.

Raising the "debt ceiling" is a legislative manoeuvre crucial for enabling the world's largest economy to meet its financial obligations, including paying bills, fulfilling dues to creditors, and providing wages to employees. The current debt ceiling stands at a staggering $31 trillion, setting a new record for sovereign debt worldwide in absolute terms. In 2011, the United States faced a similar situation, resulting in a downgrade of its credit rating. During the weekend, approximately 40 Republican senators declared, "We will not support any measure that raises the debt ceiling without fundamental reforms to the budget and government spending." Could this situation potentially give rise to an unforeseen catastrophe, akin to the reappearance of a black swan, where the United States becomes unable to meet its debts, leading to the emergence of new global economic crises?

While historical precedent suggests that the debt ceiling will be raised, it is ultimately the passage of time that will determine whether or not this prediction holds true.

 

Adli Kandah is an economic and financial adviser

 

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