A US Default and the Global Economy

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.

http://www.bbc.co.uk/news/world-us-canada-24467534

http://www.bbc.co.uk/news/business-24511283

3 thoughts on “A US Default and the Global Economy

  1. How will this effect industrial organization? Will limiting growth in the US markets create a higher probability of firms violating the Sherman Act and partaking in illegal collusion? In “Industrial Organization in Context”, Martin Samuels sites [sic!] growth within a market as a reason for collusion agreements to be violated. Perhaps a slow down or cessation of growth would provide firms with the incentive to collude in order to make profits.

  2. Along with this I read that the Chinese Government commented that international markets should look to a new standard other than the US dollar. They called for an international currency. I highly doubt this will occur though because even within the EU not all countries adopted the Euro. Britain kept the pound and during the European crisis was glad that it had. The EU has been a mini study to show how sometimes it may be better to rely on your own country during a recession… that is as long as your country isn’t the cause of that recession.

  3. As to IO, we won’t spend time on it this term [at least per the syllabus] but direct foreign investment is significant. General Motors sells more Buicks in China than in the US – and the top selling model was designed in Germany. However, it’s a step to tie the disarray in the US House of Representatives to Econ 243….though we could use some class time to talk about this.

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