What a U.S. Default Means for the World

October 15, 2013

Smart Planet

The United States is on the brink of defaulting on its sovereign debt for the first time since the gold standard ended. The “full faith and credit” of the United States hangs in the balance as the Republican tea party caucus is recalcitrant against raising the debt ceiling, which limits how many bonds that the U.S. Treasury can issue.

Nothing less than a global economic crisis and the status of the United States as a world power are at risk if T-bills are downgraded from their coveted AAA status. We’ve already written about how catastrophic a default would be for the U.S.; here are some of the consequences of a default for the global business environment courtesy of experts that we spoke with today.

A U.S. economic collapse & fall of the dollar as a reserve currency?

  • “If the U.S. defaults on our debts, nations such as China and Japan that lend us money will no longer want to fund our borrowing. The U.S. dollar will no longer be the reserve currency. The result will be a large spike in treasuries, a precipitous fall in the dollar and a collapse in our housing market – which depends critically on low interest rates. Stock prices on Wall Street will also fall considerably due to increase risk. Trust is difficult to gain, but easy to lose. Nations and lenders will no longer trust that the U.S. government is functional. In the past we swerved when we approached the cliff. Defaulting will be confirmation that Washington is not only dysfunctional but inept at solving this nation’s economic problems. Government is supposed to enable businesses and our economic system to function properly – a default would be the government disabling our economic system. Since we left the gold standard, the current U.S. financial system is based on trust. U.S. government interest rates are lower than private corporations, which are lower than the rate that individuals can borrow because the U.S. government has always honored its obligations. The issue first came up when Alexander Hamilton, our first treasury secretary, was asked by members of Congress not to honor our borrowing debts to individuals and countries who lent us money to fight the revolutionary war.

“Hamilton had the foresight to realize a good reputation of honoring one’s debt is critical for a young nation” — Dr. Jack Stauss, chair and professor with the School of Finance at the University of Denver’s Daniel Business College.