US debt is complex right now. It’s like the crisis is spreading like a virus throughout the global financial system. But India remains unaffected.
First, a little bit of background. This year, we’ve seen three of the five largest bank failures in US history. So, when experts say the US is drowning in debt and corporate bankruptcies are piling up at the second-fastest pace since 2008, you better believe it.
The debt-to-GDP ratio of the US is already well above 100%. The Fed’s willingness to increase interest rates as high as they need to, for inflation to come down was one of the focal points of discussion. What happens when the US increases rates above a certain threshold? Will it cause a recession? Last week, one of the top rating agencies Fitch dropped a bomb and downgraded the credit rating of US debt to AA+ from the highest rating AAA.
This downgrade comes after lawmakers negotiated up until the last minute on a debt ceiling deal in May this year, risking the nation’s first default. Indian markets fell sharply for the next two days post announcement of the downgrade. A debt default crisis would shock the global financial markets to its core.
The last time the US was at risk of a default in 2011, stock markets had crashed. But a compromise was found at the last minute. Back then, the rating agency in question was S&P.
The limit on borrowing was only raised after protracted negotiations. If you ask us, we believe the Fed will try to return to loose monetary policy or else they risk bankrupting the US. The common saying, ‘If you play with fire, then you risk getting burnt’, is applicable here.
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