Explained | US is 'running out of cash'. What is the debt ceiling crisis?

The United States is the largest economy in the world. The US Dollar is an unofficial global currency sought after by almost everyone. These two facts are enough to convince anyone of the pre-eminent position the country enjoys in all things money. Of course, things are more complicated than blanket statements, but in all discussions on the topic, the US invariably has a centralposition.

So it follows that if the US economy just sneezes, the entire world gets a fever, and currently, the US is tottering on debt default due to the debt ceiling crisis.

What is debt default?

In simple words, debt default is the inability of a borrower to pay back the debt. Such a default may not cause massive problems if it is just a private individual defaulting. But if a country defaults on its debts, there is sure to be aripple effect in the world. And if that country is the USA, then all bets are off on the future of the world economy or even its stability and existence.

Watch | US Treasury Secretary warns country running out of cash

What is debt ceiling?

The US has been running a fiscal deficit since 2001. This means that the income of the US government is less than its expenditure.

To meet its expenses and commitments (like debt repayment), the US has to borrow money. Now there is a limit up to which the US government can borrow. This is called a debt ceiling.

US Congress has the power to approve funds and budgets for the US government. The Congress approves the debt ceiling. If the government borrowings reach this limit, Congress takes a decision on raising the debt ceiling in accordance with the situation before the country.

What will happen if the debt ceiling is not increased?

The US will default on its debt if the debt ceiling is not raised. This means that it will not have money to pay off its loans.

So what?

This is not a situation where you are just delaying payments to a friend. In case the US defaults on its debts, it will mean that the richest, most powerful nation with all the might in the world is making an apologetic face and saying 'I can't pay off the loan, brother'.

Since the world economy more orless revolves around the US, it is considered to be the safest economy to invest in. Nations and entities are more than eager to lend to the US as there is a near-100 per cent guarantee that the debt will be repaid in full with interest. US debt default would shatter this image.

What happens if debt ceiling is breached or US defaults on debt?

Disaster! The US economy would be very badly hit. Moody's Analytics has estimated that if the US breaches the debt limit for just a week,1.5 million people will lose their jobs.

And if debt default stretches well into the summer, US economic growth will sink, and 7.8 million jobs will vanish into thin air. Borrowing rates would rise quickly. A stock market nosedive would mean that USD 10 trillion in household wealth would be erased.

And if the US economy goes down, those heavily invested in it (almost the entire world) will feel the heat in a manner most catastrophic.

So by when the debt ceiling needs to be raised to avoid all this?

In January, US Treasury Secretary Janet Yellen had said that government could pay its bill only through early June without increasing the limit.

June is not too far away.

So raise the debt ceiling!What's the holdup?

The decision lies with the US Congress. And usual elements of a political fight between the Democratic Party and the Republican Party are on show here. The Biden administration and the Republicans are currently at an impasse. Proposals from one side are unacceptable to the other.

In the month of April this year, Republicans in the House of Representatives passed a bill that will see the debt ceiling raised by USD 1.5 trillion or till March 31, 2014, whichever comes first. The House of Representatives is controlled by the Republicans.

However, Republicans have also set several conditions which are so far unacceptable to Biden and Democrats.

Republicans are arguing that the measures they've suggested are important for the health of the US economy. But the Democrats are saying that Republicans are cutting welfare measures.

According to Yahoo Finance, "These measures, Republicans say, would impose fiscal discipline on Washington that has been lacking in recent years. Meanwhile, critics say the plan would disproportionately place the responsibility for lowering the deficit on social programmes while skirting major cuts to politically popular programs like the Pentagon and veteran services that McCarthy has said will largely be spared."

On Sunday, Biden said that Republicans must budge from their 'extreme positions' and that agreement on these terms is not possible.

"It’s time for Republicans to accept that there is no bipartisan deal to be made solelyon their partisan terms. Now it’s time for the other side to move from their extreme position," he said.

Whatever happens, raising the debt ceiling is the safest way to prevent the catastrophic ripple effect. The world looks on as US Congress debates.

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