Beyond the Compass, Columns, Opinion

The United States must avoid default | Beyond the Compass

While it may appear that the United States could default on its debts as early as June unless Congress raises the borrowing limit, the probability of that outcome is virtually zero. This is yet another display of theater in politics, grappling over one of the riskiest, reddest levers available: the global economy.

The government reached its debt ceiling of approximately $31 trillion on Jan. 19, which legally limits the amount the country can borrow to cover expenses that tax revenue cannot. Although it came close in 2011, the United States has never defaulted on its debt in modern times.

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Since January, the Treasury Department has been taking measures to satisfy government obligations with its current cash flow. However, reports suggest that the Treasury will deplete these resources and run out of cash sometime between July and September this year unless action is taken.

The actual mechanics of government funding today are, by design, beyond nearly anyone to grasp in total. So, breathless discussion of such cash flow is sure to whip up public concern and political pressure even though basically no one understands the ways in which this event is different from normal functioning.

Some Republicans in the House are currently against raising the debt limit unless Democrats agree to reduce spending. At the same time, the Biden administration has stated that it will not negotiate on the debt ceiling and that any discussion about expenditures should occur independently. 

This type of brinkmanship is standard protocol in fiscal standoffs. However, no one is prepared to take responsibility for the fallout that would ensue from a default. This is where the breathless discussion comes in. Each side is attempting to impose blame on the other in order to force capitulation — in other words, coverage of the debt ceiling is the tip of a negotiation iceberg.

If the United States did default on its debt, the consequences for the global economy could be severe. The U.S. government is a major borrower in the global financial system, and a default could cause a ripple effect throughout the global economy.

One of the most immediate impacts of a U.S. default would likely be a sharp drop in the value of the U.S. dollar, which is the world’s primary reserve currency. This might result in a capital outflow from the United States to other nations, which would cause market instability and changes in the value of currencies. 

For a country that has long been regarded as a financial leader and a safe haven for investors around the world, a default could easily erode this reputation.

Many countries have strong economic ties with the United States and rely on the stability of its industry to fuel their own growth. A default could lead to higher borrowing costs for governments and businesses, slowing investment and monetary growth worldwide.

The impact on global politics and diplomacy could have even more dire consequences. For example, it could strengthen the position of China and possibly Russia in global affairs and create instability for governments that rely on the United States to run their politics and economies.

With this in mind, also consider that domestic U.S. politics can also shape foreign politics. The whole world is not the United States — far from it — but the importance of the United States to other major economies means that citizens of other global nations place pressure on their own leaders, who in turn press the United States to come to a solution one way or the other. Therefore, media discussion of the debt ceiling creates direct political pressure by not only constituents, but by other countries as well.

As long as politicians continue to politicize the issue of the U.S. national debt, the country’s economic stability will become increasingly imperiled. Though there is little concern that a true default will take place, businesses, nations and individuals must now consider the consequences of one — which wastes time, attention and, in some cases, money. 

We must bear in mind that the debt ceiling has been raised many times in the past, often with bipartisan support. This is a routine process that is necessary to ensure that the government can meet its financial obligations, which I am positive it will do again this time.

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  1. Incredible writing!