What would happen if the US defaulted?

Posted on

The US right wing is threatening to push the whole world economy into crisis - and yet the issue seems to have hardly been mentioned outside the States.

The issue is a simple one: the US has for reasons that are not clear, and which are obviously economically absurd, set itself a borrowing limit of US$14 trillion. On 2 August that sum will be reached and without borrowing more the US will have to default on payments due.

The US right wing are following their usual line - they won't concede anything unless they get tax cuts for the rich. And spending cuts that impact the poor. In other words, the price of the US being allowed to function is a reallocation of wealth to the rich.

And as the FT reports, if that default happens:

Standard & Poor’s has warned that it will slash the US credit rating to D, the lowest level in the event the debt ceiling is not raised and the country misses a debt payment.

Admittedly they add:

While the bond market considers that very unlikely, the ramifications of the Treasury missing a payment could be dire, given the widespread use of US bonds as collateral across financial markets.

I think that is possible. The American right wing (like some of their equivalents in the new intake of the Tory party in parliament) are so  dogmatically driven that the prospect that they might push their own  government into insolvency out of spite, committing  effective economic suicide not just for the people of the USA, but for hundreds of millions more around the world as well as banking goes into crisis throughout the world economy, is quite imaginable.

People are assuming that this crisis will be resolved.  I see no reason to think that.  I think that a technical default is possible, and as we all know, the rating agencies will delight in then marking down the dollar.  That will  deny one of the biggest assets in the world investment-grade status  which will in turn mean a massive sell-off of bonds and it will mean massive write-downs in the value of the US bond holdings around the world on bank balance sheets, and will trigger further economic crisis worldwide.

That's what the American right want:  have no doubt that their aim is to undermine the effectiveness of democratic government by destroying its capacity to operate.  That's exactly what they're doing in the US right now.

And that is precisely why all democrats the world over should be opposing them.