Barring Congressional action, on Thursday, October 17th the United States will default on its obligations to its creditors. In spite of the promise of John Boehner and others that the Republican Party will reach a solution to the debt ceiling crisis, the inability of the Congress to even reopen the Federal Government is an ominous sign for the next four days of negotiations. As great as the ramifications will be in the United States, their potential to upset the global economy is even greater.
Ten countries use the USD exclusively, and the government of Zimbabwe uses the dollar for its transactions. Furthermore, the United States’ role as the foremost global economic power means that numerous other countries are directly affected by a US default. International use of the dollar as a reserve currency further illustrates the serious nature of the situation.
In the short run, a US default on its currency would cause a serious drop in investor confidence worldwide, drying up credit. Paralleling this, the ability of the US to find international credit even after the resolution of the default would diminish, forcing painful spending cuts and potentially initiating another recession. Countries like China and Japan would likely begin to exchange their USD assets for another reserve currency, especially the Euro, further undermining the prospects of a US recovery. A default would thereby seriously undermine both short run and long run US economic growth, making the growth of enterprise difficult and the dollar much less stable.