Commentary: Catastrophe for world economy is likely if US default on debt

“The US debt ceiling puts a cap on how much money the US national government can borrow. US government spending is at levels which cannot be honoured without further debt; the US could end up unable to pay its commitments as soon as next month. High deficits are the combination of long-term trends in tax reductions, and unprecedented spending in a post-pandemic, low-growth world. 

“A US debt default would be catastrophic both for the US and the rest of the world. Evidence shows that defaulting countries go through recessions, devaluations, unemployment and inflation hikes. Large defaults in recent history concern developing economies (ie. Russia in the 90s, or Argentina and Lebanon more recently). But the US is the major player in the world economy, considered one of the safest borrowers in the world. US treasuries and dollars are major “safe assets” (that is, the assets people buy as refuge in uncertain times). A default would undermine this stabilising role and be a game changer, taking us into unknown territory.

“It is, however, unlikely that such default happens. For one, it is not in the interest of anyone, so it is likely that Republicans will accept to raise the ceiling. Nevertheless, the situation strongly weakens Biden’s position, who will probably need to accept the Republicans demands and, mostly, it this adds uncertainty to an already complicated global situation.  Alternative solutions to raising the debt ceiling, such as asking for the Fed’s help are bad ideas, as they are likely to fuel inflation even more and have worst long-term consequences.”