The Debt Ceiling Crisis Only Makes the World More Dangerous
By Ambassador Patrick Theros - May 19, 2023 The National Herald
Hopefully
we will have extended the debt ceiling before this article hits the
press. (It is a dangerous law and should be repealed if not found
unconstitutional but that is a discussion for another time.) That does
not mean that the criminally stupid (no other words describe it)
hostage-taking perpetrated by a tiny minority of the GOP caucus that
controls the House of Representatives will not have consequences. The
financial markets have already reacted. Bondholders are abandoning
short term Treasury bonds; once the safest debt in the world. This
indicates that the market experts believe (hope) that sanity will
prevail before the US government defaults. However, even if the crisis
were to be resolved tomorrow, we will pay a price. The US government
(i.e., tax payers) will have to fork out a lot more money servicing the
national debt. The last time the crazies took us close to the brink,
the USG paid an additional one billion dollars in interest payments. (So
much for reducing the deficit.) If McCarthy and the Freedom Caucus do
miscalculate and push us into default, the consequences will be
catastrophic. Mind you, this is not to argue that the US can avoid a
serious relook at how it spends money; we do owe too much. But nor is it
an argument for the President to give in to the blackmailers; accepting
the “Freedom Caucus” ultimatum to avoid a debt default will still cost
millions of jobs among working class Americans. (The rich have, in the
words of one economist, already “priced in” the costs of the crisis.)
Until
a few days ago, most of the rest of the world appeared to be ignoring
the discussion. Americans focus mostly on the domestic repercussions and
pay little attention to the international repercussions for the
economic and geostrategic interests of the United States. Given the
paucity of international reporting in the American press I conducted my
own informal and unscientific poll among friends and contacts abroad.
Initially most of my interlocutors said that they did not think the US
would default; that American politicians were engaged in domestic
theater but would never go over the edge. An Egyptian acquaintance who
does not like the US very much believes it to be an American conspiracy,
“.. or a bi-partisan scarecrow branding to your creditors.”
Lately,
foreigners seem a bit more worried. A tech industry executive in the
Persian Gulf wrote: “We are just waking up to it here. It could well be
the biggest financial disaster in modern American history. Responses
from Europe and the Middle East focused mostly on concern the crisis
will hasten the end of the US dollar as the dominant world currency. One
Middle Eastern businessman wrote: “Hi Patrick, Note that most of our
currencies are pegged to the dollar. … Lots of people are making baskets
and balancing their account with other currencies like YEN, Swiss franc
etc. Some are betting on WAN (a blockchain exchange mechanism). For
sure, most people don’t believe that the US $ will continue to be world
currency. It is a matter of time.”
Responses from the Far East
mirrored concerns that the crisis will seriously undermine the dollar as
the world’s reserve currency and enhance China's position as a global
financial and political leader and enable China to increase its
geopolitical influence. However, the response from the Far East focused
more on the harm default would inflict on America’s strategic influence
and military power. Many fear that the US debt crisis would reduce
America’s ability to support its allies in the region. A default could
severely limit the US's ability to fund military operations and maintain
a robust military presence globally. If Republicans force a default, it
would be seen as a triumph of isolationism.
Even if the US
avoids default, they write, the crisis already has called American
reliability into question. China could exploit the crisis to forge
stronger diplomatic and military ties throughout the region, either by
intervening in regional disputes or coercing its weaker adversaries.
Japan may need to reevaluate its defense strategies and increase its
military spending, potentially deciding that it too needed a nuclear
capability. South Korea would have even more incentive to go nuclear if
the crisis were perceived to weaken the US. One friend noted similarity
to the British withdrawal from the Indian Ocean region in 1971 following
a severe economic crisis. London lost all control in the region,
forever.
The position of the US dollar as the world’s
reserve currency underpins American prosperity and power. The US dollar
is the world’s reserve currency because the world banks in America; the
world perceives the United States as the safest place to park its
money. American citizens do not seem to understand that those same
foreign holdings of Treasury bonds have financed the cheap domestic
credit that built our current prosperity. American citizens also need
to understand that the position of the dollar as the reserve currency
gives us more power and influence in the world than our nuclear arsenal
and our carrier battle groups. We can seriously damage the economy of
any country in the world, as we just did to Russia, by blocking its
dollar deposits anywhere in the world and preventing its banks from
trading in dollars. To be honest, we have overdone it, using financial
sanctions as a blunt instrument far too often as a substitute for good
diplomacy. Countries that we have sanctioned are doing their utmost to
find ways of working around the dollar. A default would almost certainly
destroy the dollar’s reserve currency status and force even our allies
into trading in other currencies. It would be a Godsend for Putin, Xi
Jinping, Kim Jong Il and the mullahs in Tehran.