Yahoo Finance: If the US Defaults on Debt, Expect the Dollar to Fall - and with it, Americans' Standard of Living

Article by Michael Humphries in Yahoo Finance

Congress has seemingly kicked the debt ceiling deadline down the road – but the threat of a future default still exists.

On Oct. 7, 2021, lawmakers in the Senate agreed to extend the government’s ability to borrow until December. It came after Senate Minority Leader Mitch McConnell offered a temporary suspension to the debt limit, averting a default until at least December. But at that point, Democrats would have to find a way to raise the debt ceiling on their own – something they’ve said they won’t do.

This isn’t the first time Republicans have resisted helping a Democratic president raise the debt ceiling.

As an economist, I know that this political game of chicken has real-life consequences – even if it doesn’t end with default. In August 2011, during the Obama administration, brinkmanship over the debt ceiling led to an unprecedented downgrade of the United States’ credit rating, which caused markets to plunge.

What happens if the U.S. defaults?

If Congress doesn’t suspend or raise the debt ceiling, the government would not be able to borrow additional funds to meet its obligations, including interest payments to bondholders. That would most likely trigger a default.

The knock-on effect of the U.S. defaulting would be catastrophic. Investors such as pension funds and banks holding U.S. debt could fail.

Tens of millions of Americans and thousands of companies that depend on government support could suffer. The dollar’s value could collapse, and the U.S. economy would most likely sink back into recession.

And that’s just the start. The U.S. dollar could also lose its unique place in the world as its primary “unit of account,” which means that it is widely used in global finance and trade. Without this status, Americans simply wouldn’t be able to maintain their current standard of living.

A U.S. default would set off a series of events, including a depreciating dollar and surging inflation, that I believe would likely lead to the abandonment of the U.S. dollar as a global unit of account.

The combination of all this would make it a ......

To read this article in Yahoo Finance in its entirety, click here.