US Economy Threatened by Banking Crisis, Defaulting on Debt, and Dedollarization

International

Jakarta, CNBC Indonesia – The position of the United States (US), which holds the hegemony of world economic power, began to falter. This is due to the condition of the country’s domestic economy and the maneuvers of several world countries to leave Washington’s domination.

The following are some of the phenomena that have begun to threaten the position of the US economy as summarized CNBC IndonesiaWednesday (10/5/2023):

1. Banking Crisis

The banking crisis began to hit the US. Starting from Silicon Valley Bank (SVB) last March, then followed by Bank Silvergate and Signature.

Most recently, First Republic Bank, which collapsed after its shares plunged 50% last April. Rescue efforts were also carried out by being acquired by JPMorgan Chase & Co.

The collapse of the banks here is inseparable from the high interest rates in Uncle Sam’s country. US interest rates are currently in the range of 4.75% to 5%.

The US Federal Reserve (The Fed) is expected to continue raising its benchmark interest rate this Wednesday local time. This Hawkish stance was carried out by the Fed as a step to tame high inflation amidst tight labor market conditions and a volatile banking sector.

2. Defaulting on Debt (Default)

Uncle Sam’s country also has the potential to default on June 1. This is due to the attitude of the parliament that has not agreed to increase the debt ceiling.

In an interview on the program ABC’s This Week, Minister of Finance (Minister of Finance) Janet Yellen said failure to raise the debt ceiling would cause a sharp economic downturn. He also predicts that the Ministry of Finance may also run out of steps to pay its debt obligations in June.

“Our current projection is that in early June, a day will come when we can’t pay our bills unless Congress raises the debt ceiling, and that’s something I strongly urge Congress to do,” Yellen said in the program. CNBC International.

Yesterday US President Joe Biden also met with a number of prominent members of parliament, including the House of Representatives from his opponent, the Republican party. But from updates ReutersWednesday, the deadlock failed to be broken.

US debt is known to reach US$ 31 trillion or around Rp. 460,000 trillion (exchange rate of Rp. 14,900/US$). The swelling debt was triggered by the Corona pandemic (Covid-19), in which the government had to pour out a US$ 5 trillion stimulus to save the economy.

However, the US has never experienced a surplus position in the state revenue and expenditure budget (APBN) since 1957. Since then, the US has continued to experience a state budget deficit, in which to finance expenditure it is necessary to increase debt through issuing Treasury for example.

Payment of interest on previously existing debt is also made by issuing more debentures. This is what Uncle Sam keeps doing.

Earlier, in 2011, the country’s debt ceiling battle also brought the US to the brink of default and prompted a downgrade of the country’s leading credit rating. “This time, the negotiations may be more difficult,” said the 2011 veteran.

3. Dedollarization

The movement to leave the US dollar (de-dollarized) in international transactions also recently emerged after Russia began proposing it in the world’s largest trade alliance, the BRICS. This proposal was initiated by Moscow because of the political maneuvers of the US and its allies to impose economic sanctions on Russia due to the war in Ukraine.

However, on the other hand, the economic turmoil in the US has also caused many countries to consider not depending too much on their liquidity in the form of that currency. Especially with the banking crisis and potential default that is likely to occur on June 1, 2023.

This was also agreed by the Managing Director of the International Monetary Fund or IMF, Kristalina Georgieva. He revealed, how currently the US dollar has lost its status as the world’s main reserve currency.

“There’s been a gradual shift away from the dollar, where it used to be 70% of reserves, now it’s a little under 60%,” Georgieva said at the Global Milken Institute 2023 event.

Meanwhile, he sees a replacement for the US dollar as a reserve currency such as the euro, British pound, Japanese yen and Chinese yuan. Of these currencies, the IMF boss sees the euro as holding the greatest potential.

It should be realized that the de-dollarization phenomenon has begun to be carried out by many countries in the world. India has issued a new policy to further increase the use of the rupee in their trade since April 2023.

One of them is with Malaysia and the United Arab Emirates (UAE). Indonesia has apparently reduced its dependency on the dollar since 2018.

Bank Indonesia (BI) is intensifying the use of local currency through settlement currency or local currency settlement (LCS) in Indonesia’s bilateral trade transactions with partner countries since 2018. LCS is a settlement of bilateral transactions between two countries that are carried out in the currency of each country where the transaction settlement is carried out within the jurisdiction of the territory of each country.

(sef/sef)