An incredulous world watched America over the last two weeks experiencing what amounted to withdrawal symptoms as negotiators from the White House and the Republican-controlled House of Representatives tried to forge an agreement over the debt ceiling.
The stakes were high, for failure to do so would’ve resulted in a doomsday scenario leading to no less than the collapse of the US economy — and with it eventually the global financial system, given the kingpin role America plays in it.
The problem with the travails of a big power is that these travails often have a ripple effect, rendering them, willy-nilly, as it were, everybody else’s around the world. It is a fact of life we can’t avoid because, to paraphrase Klemens Metternich, when America sneezes, all of us, wherever we happen to be living in this little, global village of ours, catch a darn cold.
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If the term “the debt ceiling” appears arcane to you and me, not to mention Aunt Mariam, it is because only two countries in the world, the United States and Denmark, have had it written into their laws — though only in the former is it a political hot potato that drive the executive branch of government and the opposition in Congress to locking horns over it.
As a term, the debt ceiling may sound arcane but in practice it is simplicity itself — it is simply a law put in place by the legislature restricting the amount of money the federal government can borrow to pay its bills each fiscal year.
The law was introduced in 1917, and the amount allotted annually increased since that time to reflect demographic growth, inflation, unemployment and the like, and done so under every president since Herbert Hoover, who served as the 31st chief executive in the White House from 1929 to 1933.
The law effectively put a “ceiling” on that amount in order to rein in the freedom of federal agencies to spend however much they seemingly pleased, leading to a deficit in their budgets.
In short, a default would send shock waves through the global financial system, shattering the $24 trillion market for Treasury debt, causing financial markets to freeze, which in turn would trigger an international crisis
Can America go into default?
The Biden administration wanted the debt ceiling for the next fiscal year to be raised by $2.5 trillion to a total of $31.4 trillion, and wanted it done by June 1, a deadline that, were it not met, would see America go into default — for the first time in its history.
And if you think Americans are overreacting when they view this as a fiscal calamity, consider this: If the government defaults, that means it will, for example, fail to pay senior citizens their monthly social security checks (on which many of the 60 million Americans who receive them depend for a living) and Medicare costs (on which they depend for health care); members of the military and federal workers their salaries (the government being the largest employer in the country, with 4.2 million full-time employees); and the needy in food stamps (amounting to $114 billion annually).
Were a default to occur, experts estimated that the economy would crash, the value of the dollar would tumble and more than 8 million jobs would be wiped out — eventually sending the United States crashing into recession.
Surely, the prospect of the economy of the richest and most powerful nation in history, the trendsetter in the global dialogue of cultures, going into a tailspin is unthinkable.
But June 1 was a deadline to meet as President Biden, with whom the Republican Speaker of the House of Representative had an antagonistic relationship, rushed back home from the G-7 finance conference held at the Toki Messe Convention Center in Niiga, Japan, where the world’s top economic officials met, ironically to discuss the highest emergencies facing the global economy.
“I just can’t believe that [US leaders] would let such a major, major disaster happen, when America finds itself defaulting on its debt”, European Central Bank President Christine Lagarde told CBS on Sunday. “This is not possible and I could believe it would happen”.
Europeans, along with other leaders from around the world, had every reason to be concerned, for the impact of an American default on their own economies would be incalculable.
For starters, let’s not forget that roughly half the world’s foreign currency reserves are held in dollars, and nations, rich and poor, far and wide, have traditionally looked to US Treasury bonds to safeguard their own economies. And most knew that a default would deal an uppercut to the dollar, not to mention a left hook to America’s standing abroad.
In short, a default would send shock waves through the global financial system, shattering the $24 trillion market for Treasury debt, causing financial markets to freeze, which in turn would trigger an international crisis.
“In the event of a default”, said Mark Zandt, chief economist at Moody’s Analytics, “no corner of the global economy would be spared”. And Edward Prassard, professor of Trade policy at Cornell University and senior fellow at Brookings Institute, said: “A debt default would be a cataclysmic event, an unpredictable but dramatic fallout on the global markets”.
Well, that, I say, is our problem. We can’t move away from the big guy sneezing right into our darn face.
— Fawaz Turki is a noted academic, journalist and author based in the US. He is the author of The Disinherited: Journal of a Palestinian Exile.
