US default is global economy’s ticking time bomb


In July, Fitch Ratings analyst Charles Seville put out a rather perfunctory report on how the US Congress might handle America’s credit rating.

Like most, he assumed lawmakers would be prudent. He spelled out, though, what might transpire if Republicans acted as irresponsibly as they did in 2011, back when Standard & Poor’s yanked away Washington’s AAA status.

“Failure to raise the debt limit in time to prevent a default – in the absence of a formal way of prioritizing debt service – is a meaningful but remote tail risk to the rating,” Seville said.

Not remote enough, it seems.

On Monday, returned to their 2011 couch. They blocked a bill that would’ve funded the US government and staved off a default. That action, 10 years after similar Republican Party folly, spooked world markets as rarely before.

It also put the US Treasury Department into damage control mode. On Tuesday, Treasury Secretary Janet Yellen said Washington will run out of options to avoid breaching the debt limit on October 18, pushing the US to the brink of default. This new deadline has markets on edge about the outlook for the linchpin of the global financial system.

Republicans are“playing a dangerous game with the debt limit,” says Mark Zandi, chief economist at Moody’s Analytics.

Zandi thinks a deliberate and prolonged debt-payment impasse could cost the US economy six million jobs, destroy as much as US$15 trillion in household wealth, drive unemployment toward 9% from roughly 5% now and devastate global markets.

“This economic scenario is cataclysmic,” Zandi argues.“The downturn would be comparable to that suffered during the financial crisis” of 2008.

It is also playing right into the hands of a Chinese government keen on supplanting the dollar .

Evergrande vs US default

It hardly helps that Washington’s debt exploded by $8 trillion during Donald Trump’s four years as US president alone. That’s more than twice the size of Germany’s annual gross domestic product, putting the US on a path to a $30 trillion national debt.

Covid-19 has greatly increased the financial fault lines. Coming on top of the fallout from Trump’s trade war, the pandemic slammed growth, tax revenue flows and balance sheets everywhere. It left Group of Seven (G7) governments with fewer fiscal and monetary tools to battle today’s stagnant growth environment.

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