Debt-Ceiling Standoff Threatens America’s Global Leadership

Even talk of a U.S. default is bad for the world economy and America’s standing within it

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Joshua Roberts / Reuters

There is always a lot of proud boasting in Washington about “American exceptionalism” — the idea that the U.S. was created for some higher purpose, to bring democracy and prosperity to a needy world. Perhaps in no way is the U.S. more “exceptional” than in its role in the global economy. The dollar remains the unrivaled No. 1 currency in the world and the basis for international trade. Everything from oil to corn is priced in the greenback. The U.S. economy is still the world’s largest by far, and what happens within it has an outsize impact on the rest of the world. U.S. government bonds are the bedrock of global investment, perceived in every corner of the globe as an unmatched store of wealth.

All that is being threatened by the embarrassing arm wrestling in Washington over the debt ceiling. The U.S. Treasury Department has warned that if Congress doesn’t raise the ceiling on U.S. government debt by Oct. 17, its coffers will be dangerously low, potentially leading to a default on the country’s $16.7 trillion of debt. Such a dire consequence has done little to move Republican Congressmen, who are refusing to raise the ceiling without concessions from the White House on budget cuts and other issues. “The nation’s credit is at risk because of the Administration’s refusal to sit down and have a conversation,” Republican House Speaker John Boehner said on Sunday. When asked if that meant the U.S. was headed for default, Boehner said: “That’s the path we’re on.”

Policymakers have not minced words when describing the consequences of a U.S. default. “As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse,” President Barack Obama said in a recent speech. “The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy,” warned IMF managing director Christine Lagarde. The U.S. Treasury was even blunter, predicting a default would spark another global financial crisis. “A default would be unprecedented and has the potential to be catastrophic,” it said in a recent report. “The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

(MORE: The Debt-Ceiling Crisis Is Threatening Your Quality of Life)

Just rhetoric? Not at all. In fact, these statements might be underestimating the consequences. Remember a couple of years ago the turmoil that resulted from fears that tiny Greece would default? Well, imagine the impact a default by the U.S. — an economy more than 66 times larger — would have. All of those Treasury bonds held around the world would quickly lose their value, wiping out a huge chunk of global wealth. The banks and funds that hold these bonds would take an instantaneous hit to their health, possibly destabilizing financial markets worldwide. The dollar would likely plummet in value as investors lose faith in U.S. assets. No wonder the world is getting nervous. An official in China, the world’s largest foreign holder of Treasuries (with almost $1.3 trillion of them) warned that “the clock is ticking” and pressed Washington to “ensure the safety of the Chinese investments.”

The cost to the U.S. would be greater than even this. A default would forever undermine global confidence in the ability and willingness of the U.S. to provide global economic leadership. That would hasten the decline of America’s status as the world’s “exceptional” nation. Policymakers and bankers around the world would be forced to look for other sources of economic stability. That would bolster the standing of China in global finance and commerce, and that of the dysfunctional euro. Even if Congress eventually raises the debt ceiling and avoids default, as many investors still believe, damage is being done. The mere fact that some senior politicians in Washington are willing to flirt with default over domestic political squabbles raises doubts around the world about America’s commitment to its global responsibilities and tarnishes the reputation of the U.S. as a global leader.

Back to Boehner. There is no doubt that the U.S. needs to set itself on a path to long-term fiscal strength. But blackmailing the White House with international economic conflagration and the deterioration of American global power is not the way to get it. In a speech, Boehner once asked, “If America won’t lead the way, who will?” If he truly believes in American exceptionalism — like he says he does — then he and his colleagues have to start acting like it.

MORE: Three Not-So-Crazy Ways Out of the Debt-Ceiling Crisis