We've heard this song before.
With the 1st of June as the Deadline of the Ministry of FinanceUS lawmakers are once again at a dead end to strike a deal to avoid a catastrophic default on the country's debt.
Disaster scenarios abound—part of its spectacle short lived that the public is used to in this moment of extreme polarization. The consequences of a debt default would be, as the headlines suggest, “very bad,” he says Nancy Kimelmanassistant professor of economics at Northeastern.
A default would mean that US Treasuries.without risk“—will take more risk than previously expected, Kimelman says. of the nation credit rating it would likely be downgraded—though it might not happen immediately after a default—meaning the US Treasury would have to pay more interest on future borrowing.
But a bankruptcy won't just affect the US Treasury. Its effects will ripple through financial markets, making all assets riskier and leading to falling stock prices and rising interest rates. Even the US dollar would likely take a hit, which, Kimmelman says, would benefit China and Russia.
In fact, China and Russia are working to reduce the influence of the dollar—an effort made clear recently when Russia he said he would use the Chinese yuan in settlements between “Russia and countries of Asia, Africa and Latin America”.
“The fact that the US government is going bankrupt just gives the Chinese and Russians more ammunition to take down the dollar as the pure world currency,” Kimmelman says.
The dollar has dominated the world for most of the 20th century—a sure sign of the US's political and economic standing on the world stage, Kimmelman says. Although there are countries that wish to see the dollar fall, he says, the currency is not on a downward trend. Instead, the dollar passes through cyclic periods strengthening and weakening that may be linked to geopolitical events and other pressures.
“I don't think we see any long-term trend” for the U.S. dollar, Kimelman says. “Our inflation is no worse than Europe's inflation, for example. And we still have a very independent central bank, which is key to giving the rest of the world confidence in our interest rates.”
“China is anxious for countries to buy and sell goods using the Chinese currency,” Kimmelman continued. “But right now the vast majority of their business is billed in dollars and payments are also made in dollars.”
The fiercely divided Congress now has just three weeks to come up with a plan to raise the nation's borrowing limit — a timeline that has mixed reactions and varying degrees of urgency.
“We have learned from previous debt limit impasses that waiting until the last minute to suspend or raise the debt limit can seriously damage business and consumer confidence, increase short-term borrowing costs for taxpayers and adversely affect the creditworthiness of the United States. States,” Janet Yellen wrote to lawmakers earlier this month.
Kimelman says that while it is highly unlikely that US officials will let the debt crisis continue to spiral into default, the seemingly routine game of chicken worries her.
“The language is pretty similar to what was said before,” Kimelman says. “Each side stakes a position and insists that it is not going to be bridged by it. The real issue we have to try to understand is whether the people who refuse to bend down and say, OK, let's make a deal, have more resentment than before.”
Last week, former President Donald Trump suggested to Republican lawmakers he should let the nation go bankrupt if the Democrats do not give in to their demands.
“I was absolutely horrified that a presidential candidate would say that,” Kimmelman says. “It makes me wonder if that attitude hasn't carried over into the GOP.”
Tanner Stening is a reporter for Northeastern Global News. Email him at t.stening@northeastern.edu. Follow him on Twitter @tstening90.
