Analysis | The biggest threat to U.S. economic dominance? Domestic politics.
The debt ceiling crisis dividing Washington will instigate a ripple effect beyond U.S. borders.
Arjan van Tongerlo
In a recent article for the Diplomatic Pouch Robert Bestani argued that the U.S. dollar is likely to remain the world’s most dominant currency for the foreseeable future. While China is attempting to grow the importance of its own renminbi, also known as the yuan, the strength and security of the U.S. dollar are unrivaled. It is through the dominance of the dollar, and the dominance of global financial systems, that the United States enjoys a large economic advantage. Yet, there is one threat that could harm U.S. global economic dominance: domestic politics.
Stable no more?
The domestic political divide within the United States is threatening the position of the dollar, and all the benefits that come with the currency’s dominance. Bestani argues the dollar is seen as a safe haven, as the United States has never defaulted on its debt. Yet, the current stand-off between Republicans and Democrats over the debt ceiling is threatening to undo this stability.
Treasury Secretary Janet Yellen has warned Congress that the United States may have to default on its debt as early as June 1. Simply put, the United States is running out of money to pay its bills. What brought us here is the spending pattern of the government. Over the past twenty years, the United States has annually spent more money than it brings in. Averaging a deficit of almost $1 trillion per year, the United States needs loans to cover its expenses. In January, public debt reached $31.4 trillion.
While the United States tends to borrow more money to cover its existing payments, there is a limit. In 1917, Congress enacted the debt ceiling to limit how much money can be borrowed. As the current debt ceiling sits at $31.4 trillion, the Biden administration can no longer accumulate federal debt. The good news is that Congress can raise the debt ceiling. Since 1960, the debt ceiling has been raised 78 times, the majority of which occurred under Republican administrations.
A game of brinkmanship
The debate surrounding the debt ceiling has become a partisan game of chicken. Republicans and Democrats are in a political deadlock over the conditions attached to raising the debt ceiling. Since Republicans hold a majority of the House of Representatives and Democrats control the Senate, bipartisanship is required for any resolution to pass Congress.
Republicans are using the urgency of the debt crisis as leverage to gain concessions from the Biden administration. On April 19, the majority leader in the House of Representatives Kevin McCarthy unveiled the Limit, Save, Grow Act. This act would raise the debt ceiling by $1.5 trillion or suspend the limit through March 31, 2024. The Republican proposal does, however, come at a cost to Democrats. Approval of the Act would cut numerous flagship programs of the Biden administration. The Inflation Reduction Act, student loan forgiveness, and $70 billion in additional IRS funding are among the victims. Therefore, while the bill narrowly passed the House, it was dead upon arrival in the Senate.
Under the leadership of President Biden, the Democratic party wants the debt ceiling raised or suspended without restrictions. As part of their argument, Democrats point out that such an unrestricted raise of the debt ceiling occurred three times under the Trump administration. With the June 1st deadline fast approaching, Democrats are increasingly frustrated with the Republican power play. So far, meetings between President Biden and congressional leaders have yet to result in tangible progress.
A national affair with global implications
While the stand-off over the debt crisis is a continuation of the growing partisan divide, its consequences can reach far beyond the shores of the United States. While the precise effects of a debt default cannot be predicted as of yet, what is certain is that a default would send shockwaves around the world. The U.S. position as a pillar of global economic and financial systems would be shattered. Few countries would benefit more than the biggest U.S. rival — China.
China is already the main vehicle of a larger push to decrease dependency on the United States. U.S. dominance over economic and financial systems offers it the opportunity to punish other countries for behavior it sees as unacceptable. Banning Russian banks from the global financial telecommunication system SWIFT and sanctioning foreign regimes are among the strategies through which the United States leverages its position. In an attempt to decrease the power the United States holds over the global economy, non-Western countries are increasingly seeking to decouple from the dollar. As such, China is pushing its yuan as an alternative to the dollar. Countries such as Russia, Brazil, and Iran have increased their use of the yuan. While the yuan only accounts for three percent of global reserves, a U.S. debt default would likely draw more non-Western countries towards the yuan. This would subsequently decrease the global role of the United States while increasing China’s status.
Among the biggest victims of a debt default would therefore be the U.S. dollar. More than half of global trade is conducted in dollars and approximately 60 percent of all foreign reserves are held in dollars. If Washington were to declare it could no longer pay its bills the confidence of investment in U.S. Treasuries would plummet. A drop in demand for U.S. dollars would follow as the dollar loses its status as the world’s safest currency. While the European Union may push the euro as an attractive alternative, it is the Chinese yuan that will likely be the main beneficiary.
Beyond the effects of a default on the dollar, the stand-off creates a self-inflicted wound on the image of the United States as a global power. The inability of Washington to find a timely solution to its debt crisis exposes its dysfunction to the rest of the world. This puts the reliability and reputation of the United States as a global leader into question. As more and more countries position themselves as ‘non-aligned’ countries sitting in between the U.S.-China geopolitical battle, these countries are increasingly unlikely to side with the United States as long as its internal turmoil continues.
A house divided
While a solution to the current debt crisis may still be found — as was the case in previous stand-offs over the debt ceiling — the political game of chicken between Republicans and Democrats can only hurt the U.S. global image. The debt crisis is merely the latest example of how Washington is its own worst enemy. The partisan gain that can be achieved through such showdowns pales in comparison to the global ramifications it has. Just as a house divided cannot stand, a divided Washington cannot lead.
Arjan van Tongerlo is a student in the Security Studies Program at Georgetown University. He is the incoming Bunker Fellow at the Institute for Diplomacy and serves as the Associate Editor for Europe & Central Asia for the Georgetown Security Studies Review.
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