Home Breaking News The world is questioning Washington’s competence, fearing prospect of U.S. default

The world is questioning Washington’s competence, fearing prospect of U.S. default

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The world is questioning Washington’s competence, fearing prospect of U.S. default

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What would happen if the most economically powerful country were to default on its debts? The damage would be “catastrophic,” Treasury Secretary Janet L. Yellen said this week during an appearance on CNBC. “I fully expect it would cause a recession as well.”

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This impact would stretch far beyond U.S. borders. This U.S. economic turmoil would ripple across global markets. A default could be potentially devastating to foreign investors in U.S. Treasury bonds — including allied nations such as Japan, which held $1.31 trillion worth as of July, as well as rivals such as China, which held $1.07 trillion, according to Treasury data.

While the United States has come perilously close to defaulting on its debts before, there is good reason to be especially concerned about this time. Neither Democrats nor Republicans appears ready to budge. Somehow the country has ended up in a situation where minting a single platinum coin with a face value of $1 trillion or more is one of the more plausible options on the table.

Though not all experts are sure exactly what a U.S. default would mean or how it would play out, one thing seems clear: With or without a trillion-dollar coin, the political dysfunction on display would further erode perceptions of U.S. leadership on the world stage.

A default on debt could wind up being a step too far.

The debt debate reveals a strange paradox at the heart of the U.S. system. On one hand, the United States has created the strongest economy in the world. The entire reason that foreign investors buy U.S. Treasury bonds is that they are viewed as reliable. These bonds give countries with large numbers of U.S. dollars accumulated through exports a safe place to park their money. But on the other hand, the economic safety and stability that U.S. bonds represent is subject to political risk.

For a little over 100 years, the United States has had a legal limit on how much money the government can borrow, generally dubbed the debt ceiling. Congress has the right to set all spending and tax terms, but the Treasury can only borrow up to a certain limit, also set by Congress, unless a new vote is held to increase the limit.

Roger W. Ferguson Jr. of the Council on Foreign Relations writes that the only other major Western country to have a comparable rule is Denmark. “The closest Denmark came to its ceiling was in 2010, when its debt approached 75 percent of the limit. Afterward, the ceiling was more than doubled,” Ferguson wrote recently for the Council’s website.

Though the United States’ debt ceiling was first implemented during World War I, when President Woodrow Wilson wanted Congress to authorize increased borrowing for the war effort, it has since become a fiercely partisan issue. The past decade has thrice seen vicious, nail-biting debt-ceiling battles.

Usually, the parties reach an agreement at the last minute. With a bitter fight over Biden’s ambitious spending plans, this time could be different. The Treasury expects the debt limit of $28.5 trillion to be reached by Oct. 18. But Republicans have repeatedly blocked attempts to vote on raising the limit. “We’re not in the mood to facilitate their difficult job, to make their difficult job easier,” Sen. Kevin Cramer (R-N.D.) told reporters.

Democrats should instead raise the debt ceiling through a complicated process called reconciliation, Republicans say, even though Democrats backed Trump-era increases. Democrats have shot back, hinting they could change the filibuster — a practice wherein any single member can end debate on legislation unless there are 60 votes to move it forward.

Biden laid the blame firmly with Republicans this week when asked if he could guarantee the United States would not default on his debt. “No, I can’t. That’s up to Mitch McConnell,” Biden said, referring to the Senate minority leader.

This Washington war affects the world. Much of the coverage in the United States focuses on the domestic impact of a potential default — on Social Security benefits and delays in payments to government contractors — but the impact would not be limited to within U.S. borders.

“Americans would pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized and that a time may come when they would not be paid what they are owed when owed it,” Moody’s Analytics argues.

A default could result in credit-rating agencies downgrading the United States. Interest rates would spike and the value of the U.S. dollar would likely plunge. Such a scenario would not just be an economic problem, but a national security one, too, undermining key foreign policy tools like economic sanctions. Beijing has long hoped that the Chinese yuan could threaten the dollar hegemony.

“A default risks undermining the international reputation of the United States as a reliable and trustworthy economic and national security partner,” as well as “undermining the stature of the U.S. dollar as the global reserve currency of choice,” Defense Secretary Lloyd Austin wrote in a statement Wednesday.

So far, most countries appear to be watching with caution rather than true alarm. China, in the midst of its own debt crisis, is preoccupied. Japan is largely focused on the political maneuvering around its new prime minister. “I wonder whether the history of close calls in the past has induced some complacency,” said Tobias Harris, a senior fellow for Asia at the Center for American Progress.

It does all feel like deja vu. The Economist calls the battle “America’s ritualistic threats of economic self-harm.” Even in 2013, during a previous debt-ceiling debate, foreign policymakers were getting tired of the tumult. “We’re glad a deal has been struck,” an anonymous Japanese policymaker told Reuters back then. “But the uncertainty will remain and it will be the same thing all over again early next year.”

The future will likely see still more debt-ceiling battles. And with Republican politics increasingly hostile to debt-limit increases, it may not be too long before the world finds out what happens when the most economically powerful nation defaults on its debts.

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The world is questioning Washington’s competence, fearing prospect of U.S. default