DEFAULT DANGERU.S. Debt Default Could Trigger Dollar’s Collapse – and Severely Erode America’s Political and Economic Might
Brinkmanship over the debt ceiling has become a regular ritual. As an economist, I know that defaulting on the national debt would have real-life consequences. Even the threat of pushing the U.S. into default has an economic impact. In August 2021, the mere prospect of a potential default led to an unprecedented downgrade of the nation’s credit rating, hurting America’s financial prestige as well as countless individuals, including retirees. And that was caused by the mere specter of default. An actual default would be far more damaging.
It’s a case of déjà vu all over again on the debt ceiling debate.
Republicans, who regained control of the House of Representatives in November 2022, are threatening to not allow an increase in the debt limit unless they get unspecified spending cuts in return. In so doing, they risk pushing the U.S. government into default.
Brinkmanship over the debt ceiling has become a regular ritual – it happened under the Clinton administration in 1995, then again with Barack Obama as president in 2011, and more recently in 2021.
As an economist, I know that defaulting on the national debt would have real-life consequences. Even the threat of pushing the U.S. into default has an economic impact. In August 2021, the mere prospect of a potential default led to an unprecedented downgrade of the nation’s credit rating, hurting America’s financial prestige as well as countless individuals, including retirees.
And that was caused by the mere specter of default. An actual default would be far more damaging.
Dollar’s Collapse
Possibly the most serious consequence would be the collapse of the U.S. dollar and its replacement as global trade’s “unit of account.” That essentially means that it is widely used in global finance and trade.
Day to day, most Americans are likely unaware of the economic and political power that goes with being the world’s unit of account. Currently, more than half of world trade – from oil and gold to cars and smartphones – is in U.S. dollars, with the euro accounting for around 30% and all other currencies making up the balance.
As a result of this dominance, the U.S. is the only country on the planet that can pay its foreign debt in its own currency. This gives both the U.S. government and American companies tremendous leeway in international trade and finance.
No matter how much debt the U.S. government owes foreign investors, it can simply print the money needed to pay them back – although for economic reasons, it may not be wise to do so. Other countries must buy either the dollar or the euro to pay their foreign debt. And the only way for them to do so is to either to export more than they import or borrow more dollars or euros on the international market.
The U.S. is free from such constraints and can run up large trade deficits – that is, import more than it exports – for decades without the same consequences.
