Is US going to default on its debt?

This ЁЯз╡ will surely help you understand. Do тАШre-tweetтАЩ & help us educated investors (1/13)

How does a country run?

Assume a country to be like a company, which has income & expenses. Income source can be tax collections & expense can be government employee salaries, defence sendingтАЩs, social security schemes etc. (2/13)
Generally, most economies are running a deficit; their income is less than expense. So if your income is 100 and expense is 105, where do you get the 5? You borrow!

Similarly US has been borrowing & the total debt today roughly stands at a whooping $28.5T. (3/13)
Deficit in the last 2 years has gone up significantly because of COVID + the government wants to spend more; a $3.5T spending package is what they are trying to get an approval for + older debt is coming up for maturity (4/13)
Okay, so I am saying they will raise more debt for the deficit of COVID, the new package & paying older debt off?

Ideally a yes but they are not allowed to borrow more! (5/13)
Why canтАЩt they take more debt?

During the 1st world war, US understood if they keep spending money on the war, the debt will be a big liability 4 the future generation & hence they introduced a ceiling on the maximum debt US could take. In 1917, this was capped at $1 Billion
What happened when the $1B debt was reached?

Political parties would pass a legislation to increase the debt limits. From $1B in 1917, the debt ceiling has been moved up multiple times to the current $28.5T (https://t.co/XaLWSSGxN5), which is about to get reached now (7/13)
So what happens now?

Political parties (Like India has BJP & congress, US has Democrats & Republicans) need to agree on either suspending the debt ceiling all together or increasing the limit of borrowing by passing legislation like they have been doing in the past (8/13)
So thatтАЩs easy right?

May be, but republicans r nt in favor of suspension or тмЖя╕П in the debt ceiling. But this is common, has happened multiple times in the past. Till the legislation is passed, the government shuts down for few days & is back in action as soon as it is passed
What happens if Republicans donтАЩt agree?

A suspension or rise in the debt ceiling can be passed through a process known as budget reconciliation, due to Democrat's majority in the Senate. But some conservative democrats may not support тмЖя╕Пin spending so this may face challenges
What is the impact if at all nothing works?
Doomsday! US can't borrow more & can default eventually!

-US will not be able to pay salaries to government employees, will not be able to release social security payments, will not be able to pay other liabilities (11/13)
- US interest rates will go up (you want more returns if the risk increases)
- $ will crash
- Both of the above to have a massive impact on world trade & markets as still 84% of the world trade happens in $ & other countries have huge investments in US treasuries (12/13)
Consensus view - We might see some delay but US will not let its debt default! (13/13)
This is my 43rd thread, 'do re-tweet'

Have earlier written on,
-Sector Analysis - Banking, Paints, Logistic, REIT, InvIT, Sugar, Steel
- Macro
- Debt Markets
- Equity
- Gold
- Personal Finance etc.

You can find them all in the link below https://t.co/UrRt87xaU7 (END)

More from Kirtan A Shah

Should you add more in Equity or redeem right now?

A thread ЁЯз╡to guide retail on why & what should they do at these historic market highs.

Do тАШre-tweetтАЩ and help us educate more retail investors (1/n)

#investing #StockMarket

Some investors feel that markets are trading at a PE of 27 vs 10 years historical average of 20 and a market-cap to GDP of 105 vs historical average of 79 and hence markets look expensive (2/n)


But, in such crazy liquidity driven markets, prices can move much ahead of the fundamentals & suddenly we start hearing commentaries of how the market is pricing in the earnings of FY 22 & 23 to justify the rally

If you r new to fundamentals, ЁЯСЗ can help


Results for Q4 have come out very well but that is also because of the lower base effect of the last year.

Over the last many years, markets have corrected 10-15% each calendar year. Can it happen this year as well? Can very much and that can be a great entry point. Why? (4/n)


There are a lot of over hangs in the near term,
-Crude going up
-$ index moving up
-Inflation moving up
-COVID uncertainties
All of the above are тАУve for markets & liquidity on the other side driving markets up, its impossible to judge the near term movement of the markets (5/n)

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