Like all governments, the US government also borrows to bridge the difference between its earnings and spending, usually through treasury securities. And, like in most countries, there is a cap on how much money the government can borrow.
Currently, the debt ceiling in the US is about $28.5 trillion. If the government hits this ceiling, it would need Congress to raise the limit. Otherwise, the government might default on its obligations, which includes everything from interest payments to salaries and social security payments.
In the current situation, this will dent the recovery of the economy from the COVID-induced slowdown, as non-payment of salaries and benefits will have a strong negative impact on consumer spending.
The drama in Washington over increasing the ceiling and the risk of higher inflation owing to the spike in energy charges have pushed the treasury yield upwards. The poor show of the stock markets last week is attributed to this tricky scenario, as investors channelled money to less risky options, leading to a correction in the markets.
The impasse in the US will most likely get over soon. But it has definitely made the markets nervous. And what happens in the American stock markets usually has repercussions all over the world. Indian markets' poor show, despite the good growth in the core sectors, was largely on global cues.
