- According to financial experts, a debt default by the US would spell chaos for both the American and global economies.
- The U.S. dollar, whose dominance over the world’s monetary system has provided the country with exceptional benefits for decades, now has a chink in its armour due to the debt crisis.
- According to economists at Goldman Sachs, a debt ceiling breach would immediately halt one-tenth of U.S. economic activity.
- A declining dollar could make debts in other currencies comparatively more expensive and threaten to push some emerging economies into debt crises.
Allies and enemies of the United States are probably perplexed by the drama around the federal debt ceiling and wondering how serious Washington is about being the world’s leader. President Joe Biden was forced to postpone a significant trip to Asia that was intended to target two of the top targets for U.S. foreign policy, Russia and China. In addition to this, the United States appears to be on the edge of a debt default, a move that would cripple the global economy.
Whether or not the debt limit should be increased, this week’s confrontation is a warning of the dangers that growing divisiveness in Washington poses to America’s long-standing position as a global leader. If American leaders are unable to resolve their internal conflicts and lessen the virulent political polarisation, the country will enter a time of global strategic competition with one hand tied behind its back. It’s not necessarily disastrous that Biden’s trips to Australia and Papua New Guinea were postponed. Biden will still be present at the G7 summit in Japan, where he will also have a meeting with the Quad, or the leaders of Australia, India, and Japan (Australia was previously slated to host the Quad meeting). In order to strengthen the Quad’s position as a democratic alternative to China in the Indo-Pacific, Biden intends to utilise these meetings to increase sanctions against Russia. The incident, however, highlights the significant threats that Washington’s inefficiency poses to America’s future influence in the globe.
Threat to America’s Influence across the Globe
Foreign leaders’ scepticism of the United States will grow, harming Washington’s relations with the very nations whose allegiance it is vying to take on Beijing. Brazil, India, Indonesia, South Africa, and Turkey are just a few of the countries that have been hedging their bets and avoiding cooperation with the United States on important issues like the conflict in Ukraine. Those on the fence will become even more hesitant to support Washington on matters that will matter in the future as a result of Washington’s evident determination to choke off the global financial system and bring down their economies.
As a result of these shenanigans, the U.S. dollar, whose dominance over the world’s monetary system has provided the country with exceptional benefits for decades, has yet another chink in its armour. Countries are already looking for alternatives to the dollar for their international transactions due to the recent rapid expansion of so-called secondary sanctions. Beijing envisions using the yuan to close the gap in the future. Even if it takes decades, the prospect of a U.S. default will undoubtedly strengthen Beijing’s argument that its time will come.
More importantly, the fact that the president was forced to cancel portions of a trip that was intended to advance one of his top foreign policy objectives—assembling a coalition of Asian allies who share his concerns about China—illustrates how seriously domestic disputes in the United States can affect the country’s ability to uphold its commitments, whether to allies, partners, treaties, or other international agreements. Due to this polarization, American diplomats will have a difficult time persuading other countries that Washington can be trusted to uphold its commitments beyond an election cycle. Additionally, this will make it more common for nations to hedge their bets between the United States and its enemies, particularly Russia and China.
In the international struggle over ideologies, Washington’s dysfunction also aids its autocratic rivals. China has been making efforts to win over nations by presenting an authoritarian alternative to America’s liberal economic and political model, one that extols the alleged benefits of political and economic stability achieved through authoritarian means. But the more disorganized American democracy appears from Africa, West Asia, Asia, and South America, the more China will succeed in convincing the unsure that its authoritarian alternative actually makes sense.
Political polarization has no simple cure, but the worst of the current brinkmanship is probably going to be avoided. To maintain the expansive global role that the United States aspires to, however, American leaders must take additional steps to clean up their domestic affairs.
What would happen if the United States went over its debt limit?
According to some experts, that would spell chaos for both the American and global economies. Hitting the debt ceiling would make it difficult for the government to pay for operations, such as paying for the national defence or entitlement programs like Medicare and Social Security, even if there was no default. Reaching the ceiling could have negative effects, such as credit rating downgrades, higher borrowing costs for both businesses and homeowners and a decline in consumer confidence that could shock the U.S. financial market and send the economy into recession. According to economists at Goldman Sachs, a debt ceiling breach would immediately halt one-tenth of U.S. economic activity. Further, a breach that results in default could result in the loss of three million jobs, an increase in the price of an average thirty-year mortgage of $130,000, and an increase in interest rates that would result in an $850 billion increase in the national debt. Additionally, higher interest rates may cause future taxpayer funds to be diverted from crucial federal investments in areas like infrastructure and others.
Could a breach of the US debt ceiling collapse other markets?
A U.S. default, according to experts, could devastate international financial markets. The demand for U.S. dollars has long been supported by the creditworthiness of U.S. treasury securities, which has increased their value and made them the world’s reserve currency. Investors may sell US treasury bonds if they lose confidence in the US economy as a result of a default or the uncertainty surrounding one, which would weaken the dollar.
Since more than half of the world’s foreign exchange reserves are held in dollars, a sharp decline in the value of the greenback could cause treasury prices to rise. A declining dollar could make debts in other currencies comparatively more expensive and threaten to push some emerging economies into debt crises as heavily indebted low-income countries struggle to pay interest on their sovereign debts.
The depreciation of the dollar could be advantageous for many American exporters because it would spur demand abroad for their products by making them more affordable. However, as interest rates rise, the same businesses would also pay higher borrowing costs. Dollar volatility may also be advantageous for rising great-power rivals like China. Even though Beijing has long aimed to establish the renminbi as a major reserve currency, it only makes up about 3% of total global foreign exchange holdings.
(The author is a post-graduate student in International Relations at Kalinga University, Raipur. The opinions expressed are the author’s own)