All hostages to the imminent US default

May 21, 2023 0 By Michel Santi

Is it time to doubt the American economy, known for its dynamism? Is its financial system still as resilient in the face of challenges? Is its democratic architecture characterized by the famous “checks and balances” still functional? Not a day goes by without a nation outside its bloc announcing a measure, at the very least a step, in what it hopes will be a process of de-dollarization in an attempt to establish its own hegemony, like China or India. This serious and openly expressed desire to dethrone the dollar is also a safeguard against potential US sanctions that this country imposes through the transmission belt of its currency.

These challengers to the greenback have been widely aided in recent weeks by American politicians themselves, who get entangled in battles over raising the debt ceiling of their country. This tragicomedy of the Washington microcosm has periodically polluted the debates for nearly 30 years. However, intentionally fueled and maintained by the country’s political parties, it is now taking on a relatively dramatic turn as it undermines confidence in the US Treasury. Considered the safest and most liquid investment in the world, the T-Bond has allowed this nation throughout the ages, wars, pandemics, and bank failures to finance itself with ease and at rates lower than the rest of the world. These “US Treasury bonds” are nothing less than the keystone of the global financial system. Its $25 trillion market is the indispensable foundation of any transaction across the globe. This absurd and utterly unnecessary political turmoil from US officials could indeed result, in the event of a failure to raise the debt ceiling, in soaring financing rates, an economic crisis, and a surge in unemployment.

The actual effects will be far more devastating because no one can predict how states and institutional investors holding a significant amount of obligations that the US will stop honoring will react to the gigantic shock of the American default. No one can estimate the damage of an event that is all the more inconceivable because it will not be caused by the US’s inability to pay its debts. A potential, but entirely possible in the very near future, default will be attributable to a technical clause in place since World War I, which requires the Department of the Treasury – which financed that conflict through borrowing – to seek Congress’s authorization to raise more funds when the allotted debt limit is reached. The country – and the entire world – find themselves in 2023 as captives of a practice dating back more than a century, which aimed at simplifying the war financing process because the US government had to pass a new law every time it wanted to issue a loan. Originally intended to streamline the legislative calendar, this debt ceiling was not a notable instrument of US economic policy or a weapon of mass destruction… until it became a political calculation.

Indeed, this is the third time in less than ten years that these quarrels and political tactics threaten to explode the system. While disastrous default has been avoided twice in recent history, the current debates are of a completely different nature and resemble a grotesque game of poker played by the most important political figures in the country in an atmosphere of hatred between the Democratic and Republican parties. Some of their members indulge in radical postures and smile, whispering that the United States has always narrowly avoided default.

The “Treasury bonds” – the supreme measuring instrument in all private and public lending, borrowing, guaranteeing, and investment operations – should not be held hostage to the dysfunctions of American politics. Neither should the US Treasury, which, with daily inflows and outflows of $185 billion, is undeniably the world’s largest enterprise. US lawmakers have a universal responsibility not to destabilize the world for base partisan motives. That is why journalists’ only question to American politicians should not be to inquire whether they are approaching an agreement to raise the debt ceiling, but rather whether their intention is truly to provoke an international turmoil over so little.

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