Editor’s note: This article was first published in July 2011, in the middle of the US debt-ceiling negotiations. The ceiling was raised in early August 2011 and the default the article discusses did not happen.
The United States is negotiating desperately to raise its debt ceiling and make sure the country has no trouble meeting its international obligations. If the US were to stop paying its debts, it would be the first time in history, so the consequences for the world economy would be completely unpredictable.
Even so, experts say that if it did happen, it would end up directly affecting ordinary people all over the world.
If the dollar falls, inflation rises
Credit problems could directly undermine the credibility of the US dollar, so far the world’s great reserve currency, leading small, medium and large investors to stop buying it. If the dollar falls, the price of imported goods and the cost of living would rise. In short, inflation would go up directly in countries across the Americas, especially those that have adopted the dollar as their currency. This rise in inflation would take less than 48 hours to cross the Atlantic and hit Europe, and little by little it would eat into markets all over the world.
Treasury bonds and pension plans would be worthless
Until now, US Treasury bonds have been one of the investments that give investors the most peace of mind, not least because they are the backbone of the global bond market. If the United States could not pay these bonds, it would trigger the biggest crisis of confidence in history.
Some small investors think a loss in the value of these bonds wouldn’t affect them, but that is far from reality: a large share of the world’s investment funds and pension plans hold US paper in their portfolios.
If unemployment rises, US purchases fall
Ordinary Americans are living through a situation similar to that of many eurozone countries, so they are in “austerity mode”. It’s no different for the government, which has to cut spending and reduce its purchases abroad. The United States could launch a shock plan that lays off public employees, pushing up unemployment. And in the middle of a technology boom, far from creating jobs, the reality is that today the US is destroying jobs because of new technologies.
When unemployment grows, the economy shrinks.
Credit collapse
When the investment bank Lehman Brothers collapsed in 2008, credit markets froze; nobody trusted anyone enough to lend. A US default is such an unusual situation that no one can predict the consequences, although nobody denies they would be tragic for the world economy. Some even believe it would bring us close to a situation like 1929.
That is why the debt-ceiling increase will undoubtedly be approved, with the backing of several billionaires such as Warren Buffett and Bill Gates, among others, since these two men today have more liquidity than the US government itself.
Further reading
Featured image: Tony Webster, CC BY-SA 3.0, via Wikimedia Commons.
