In only three years the global economy has faced two huge shocks. Now, it must prepares for the third shock due to the U.S. debt crisis. The Covid pandemic then the major war in Europe which was not happening since 1945, these two has impacted great deal to the global economy. Now, the American government is unable to pay its bills and stalking financial markets. It is somehow unthinkable because the consequences could be scary. It may never happen but there were signs that negotiations in Washington to increase the amount of the U.S. government can borrow are the momentum.
An economics professor at Dartmouth University, Danny Blanchflower, said that this default could be a million times worse and causes shock. Danny Blanchflower is a former interest rate-setter at the Bank of England. He put it into consideration and in a note that “What happens if the greatest economic monolith in the world can’t pay its bills?” Then he continued, “the consequences are frightful.” The reason why the global financial system is smooth is because the belief that America’s government can pay its creditors. At the very first place, it could make the dollar as the world’s reserve currency. Plus, the U.S. Treasury securities is the bedrock of bond markets worldwide.
A non-resident senior fellow at the Peterson Institute of International Economics, Maurice Obstfeld spoke about this situation. He said that if the credibility of the Treasury’s commitment to pay comes into question, then it can wreak havoc across many global markets. Maurice Obstfeld is a think tank in Washington. In 2011 standoff when the U.S. debt ceiling was rising, the S&P index of leading U.S. shares jumped more than 15%. This index kept falling although they have reached deals. It happened just hours before the government ran out of funds.
