Failure to reach a deal in time could have disastrous effects across the entire global financial system. Reuters
Failure to reach a deal in time could have disastrous effects across the entire global financial system. Reuters
Failure to reach a deal in time could have disastrous effects across the entire global financial system. Reuters
Failure to reach a deal in time could have disastrous effects across the entire global financial system. Reuters

What is the US debt ceiling and how would a default affect the global economy?


Kyle Fitzgerald
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With a potential debt default days away, the White House and Republicans remain locked in negotiations.

Failure to reach a deal in time could have disastrous effects across the entire global financial system.

President Joe Biden said he and House Speaker Kevin McCarthy still remain at odds over the budget, which has caused negotiations to stall.

The brinkmanship is already having effects on the economy, with credit agency Fitch putting America's AAA rating on negative credit watch.

"A default could cause widespread suffering as Americans lose the income that they need to get by. And the resulting income shock could lead to a recession that destroys many American jobs and businesses," Treasury Secretary Janet Yellen said.

Here is what you need to know:

What is the debt ceiling?

The debt ceiling – also known as the debt limit – is the total amount of debt the Treasury Department can borrow to meet its financial obligations.

Among those obligations are Social Security payments, interest on the national debt, tax refunds, military salaries and more.

The US hit its current debt limit of $31 trillion in January. The Treasury at the time announced it would take extraordinary measures to fulfil the government's obligations.

Lifting the debt ceiling does not authorise new spending, but rather allows the US to spend on programmes that had already been approved by previous administrations and sessions of Congress.

When is the 'X Date'?

The X Date is the day the US will be unable to fulfil its financial obligations.

Ms Yellen, who previously said was "impossible to predict the certainty" the exact date on which that will happen, has given the White House and Congress a "hard deadline" of June 1 to raise the ceiling.

The Treasury Secretary now says "the odds of reaching June 15, while being able to pay all of our bills, is quite low”.

What happens if the US defaults on its debt?

In a word: catastrophe.

The US government would be unable to direct payments to members of the military or people who rely on Social Security. Interest rates would soar, leading to increased payments on mortgages, car loans and credit cards.

It would almost certainly tip the US into a recession, with high unemployment. Even in the short term, a default would cease one tenth of US economic activity and cost two million positions, separate analyses from Goldman Sachs and Moody's show.

White House economists estimated that a default would cost eight million jobs and the stock market would plunge 45 per cent.

The US credit rating would also most likely be downgraded.

The global economy, too, would suffer in the event of a US debt default.

A separate Moody's report found that emerging economies will suffer from the stalled negotiations, with commodity exporters in the Middle East, Africa and Latin America suffering the most due to tightening credit conditions.

A default wound also undermine the strength of the US dollar. Sixty per cent of the world's foreign reserves are in the American currency, but investors could lose confidence in Treasury securities.

With the US dollar weakened in this scenario, it would open the door for another currency to challenge it as the world's reserve.

Should the nation's currency weaken, it would make payments more expensive for low-income countries struggling with debt.

Global trading would also decline in the event of a recession as consumers look to limit the amount of goods they purchase, hurting economies that rely on exports.

Fragile economies would also be at risk of falling into a recession.

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What drives subscription retailing?

Once the domain of newspaper home deliveries, subscription model retailing has combined with e-commerce to permeate myriad products and services.

The concept has grown tremendously around the world and is forecast to thrive further, according to UnivDatos Market Insights’ report on recent and predicted trends in the sector.

The global subscription e-commerce market was valued at $13.2 billion (Dh48.5bn) in 2018. It is forecast to touch $478.2bn in 2025, and include the entertainment, fitness, food, cosmetics, baby care and fashion sectors.

The report says subscription-based services currently constitute “a small trend within e-commerce”. The US hosts almost 70 per cent of recurring plan firms, including leaders Dollar Shave Club, Hello Fresh and Netflix. Walmart and Sephora are among longer established retailers entering the space.

UnivDatos cites younger and affluent urbanites as prime subscription targets, with women currently the largest share of end-users.

That’s expected to remain unchanged until 2025, when women will represent a $246.6bn market share, owing to increasing numbers of start-ups targeting women.

Personal care and beauty occupy the largest chunk of the worldwide subscription e-commerce market, with changing lifestyles, work schedules, customisation and convenience among the chief future drivers.

Who is Tim-Berners Lee?

Sir Tim Berners-Lee was born in London in a household of mathematicians and computer scientists. Both his mother, Mary Lee, and father, Conway, were early computer scientists who worked on the Ferranti 1 - the world's first commercially-available, general purpose digital computer. Sir Tim studied Physics at the University of Oxford and held a series of roles developing code and building software before moving to Switzerland to work for Cern, the European Particle Physics laboratory. He developed the worldwide web code as a side project in 1989 as a global information-sharing system. After releasing the first web code in 1991, Cern made it open and free for all to use. Sir Tim now campaigns for initiatives to make sure the web remains open and accessible to all.

From Europe to the Middle East, economic success brings wealth - and lifestyle diseases

A rise in obesity figures and the need for more public spending is a familiar trend in the developing world as western lifestyles are adopted.

One in five deaths around the world is now caused by bad diet, with obesity the fastest growing global risk. A high body mass index is also the top cause of metabolic diseases relating to death and disability in Kuwait,  Qatar and Oman – and second on the list in Bahrain.

In Britain, heart disease, lung cancer and Alzheimer’s remain among the leading causes of death, and people there are spending more time suffering from health problems.

The UK is expected to spend $421.4 billion on healthcare by 2040, up from $239.3 billion in 2014.

And development assistance for health is talking about the financial aid given to governments to support social, environmental development of developing countries.

 

Profile

Company name: Marefa Digital

Based: Dubai Multi Commodities Centre

Number of employees: seven

Sector: e-learning

Funding stage: Pre-seed funding of Dh1.5m in 2017 and an initial seed round of Dh2m in 2019

Investors: Friends and family 

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General admission Dh295 (under-three free)

Buy a four-person Family & Friends ticket and pay for only three tickets, so the fourth family member is free

Buy tickets at: wbworldabudhabi.com/en/tickets

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Starring: Rose, Jisoo, Jennie, Lisa

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UAE currency: the story behind the money in your pockets
UAE currency: the story behind the money in your pockets
How to increase your savings
  • Have a plan for your savings.
  • Decide on your emergency fund target and once that's achieved, assign your savings to another financial goal such as saving for a house or investing for retirement.
  • Decide on a financial goal that is important to you and put your savings to work for you.
  • It's important to have a purpose for your savings as it helps to keep you motivated to continue while also reducing the temptation to spend your savings. 

- Carol Glynn, founder of Conscious Finance Coaching

 

 

Labour dispute

The insured employee may still file an ILOE claim even if a labour dispute is ongoing post termination, but the insurer may suspend or reject payment, until the courts resolve the dispute, especially if the reason for termination is contested. The outcome of the labour court proceedings can directly affect eligibility.


- Abdullah Ishnaneh, Partner, BSA Law 

UAE currency: the story behind the money in your pockets
Updated: May 25, 2023, 7:01 PM`