Global National Debt: Is America Close To Default?

Recently, Moody's released a last year's report on global government debt. Based on this document, the pandemic and its consequences led to an annual increase in countries' external debts by $32 trillion, to $290.6 trillion. In Q4 2020, this amount increased to 105% of world GDP, whereas before the pandemic, it was "only" 88%.

In fact, we are seeing the highest rate since the end of World War II.

It is logical that the main reason for this was the global pandemic and the corresponding decline in the economies of different countries. It won't be easy to get out of this hole. The numbers continue to grow in 2021 at a breakneck pace, which can be watched in real-time on the dedicated USDebtClock portal.

Today's debt burden has become a common problem globally. This model has had devastating results in the past, including the 1997-1998 Asian financial crisis and the 2007-2008 global economic crisis.

All attention is primarily focused on the amount of the US national debt. Its total volume is now approaching $28.5 trillion. It turns out that the ratio of its sum to the country's GDP is almost 137%!

On June 23, Treasury Secretary, Janet Yellen announced that America would default if the debt burden continues to grow. On July 31, the country will hit the ceiling on the national debt: it will simply not be possible to borrow more, the figure will be frozen, and the country will have only funds from treasury bonds, which will be enough for a couple of months to cover basic expenses. It is not possible to continue servicing the national debt.

There is nowhere to take additional funds, and the pandemic continues, which means that the bar will have to be raised without even thinking about how the country will provide this money.

According to Yellen's words said last Thursday, this situation will exacerbate the financial crisis and jeopardise Americans' jobs and savings. And this is at a time when we are still recovering from the pandemic. 

Gold dropped to its May-June low on the Asian session and approached its worst monthly decline since November 2016. Now investors are waiting for data on US employment to understand what line of monetary policy will be followed by the Fed.

Gold futures lost 0.26% to $ 1,758.95. In total, in June, quotations fell by 7.5%, continuing to feel the consequences of an unexpectedly aggressive political decision made by the Federal Reserve at the beginning of the month. At the same time, for the second quarter, gold still showed an increase of 3.3%.

Without a doubt, data on non-agricultural employment will be the main driver for the market in the near future. If nonfarm payrolls show significant growth, we will see another round of decline in gold.

By the way, other precious metals are showing growth. Platinum gained 0.3%, slowly regaining its biggest monthly and quarterly decline since March 2020. Silver was up 0.3%, and palladium was up 0.5%.

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On Wednesday, despite a slight decline, the American currency managed to maintain its recently won levels. The dollar index has so far declined only 0.01% to 92.030, while on Tuesday's session, the price climbed 0.2% to a weekly high.

The proliferation of the new Delta strain in several countries has reduced the risk appetite of investors. The growing number of infections in Australia has already led to renewed isolation measures in four cities. If this kind of news continues - and these are clearly not the last such reports - the global economic recovery will be seriously threatened.

A stronger-than-expected NFP could prompt the Fed to cut assets and raise interest rates earlier than expected, boosting the dollar. However, weak data will leave the US currency vulnerable. The risk of getting unexpectedly low as well as unexpectedly strong data this time is enormous, and no one undertakes to predict the result according to NFP. In any case, it would turn into a simple guessing game.

Written By: FxPro Financial Services Ltd