/ world today news/ Political opposition over the US debt ceiling threatens America’s status as an economic superpower.
America’s influence on the world economy has been undermined by self-inflicted political wounds. A dangerous showdown over the debt ceiling is forcing renewed attention to the dollar’s precarious status in global trade and finance, according to a Bloomberg report.
The news agency noted that the US Federal Reserve is “behind” the current situation. Inflation, a series of bank failures and now the political impasse over the government’s ability to borrow funds are eroding confidence in the US.
At the same time, the geopolitical confrontation with Russia and China is only intensifying, so any wrong move by politicians in Washington can significantly weaken the American position.
Warnings of a decline in US economic prestige are everywhere. On May 9, Beth Hammack, co-chairman of the global financial group Goldman Sachs, told Bloomberg: “Anything that distracts us from considering the dollar as the world’s reserve currency, the world’s safest and most liquid asset, is bad for the American people and government “.
The dollar is the most widely used currency in trade and financial transactions. The US currency still accounted for 59.5% of central banks’ official foreign reserves in 2022, according to the Congressional Budget Office. However, this is the lowest figure in a quarter of a century (in 2001 it was 71.5%) – a sign that the dollar’s dominance is waning.
During these uncertain times, many countries are announcing a gradual transition to using their own currency. Russia, China and India have already renewed discussions on the long-standing topic of de-dollarization to hedge and protect themselves from US sanctions and avoid economic isolation.
This is not just a matter of geopolitics. Eswar Prasad, an American economist and professor at Cornell University, said the pillars supporting the dollar are beginning to crack:
“It is increasingly difficult to view the United States as a well-functioning, dynamic economy with a deep and sound financial system, supported by a reliable policymaking process with a system of checks and balances.”
Investors may not pay much attention to Brazilian President Lula da Silva’s call for an end to the dominance of the dollar, as he did during a state visit to China this April.
More troubling to them is the political showdown in Washington over the debt limit, a spectacle that, to the dismay of many, has become routine over the past quarter century, repeatedly bringing America to the brink of artificial crisis.
JPMorgan Chase CEO Jamie Dimon has already set up a task force to prepare for what could be a “catastrophic” default, an event Treasury Secretary Janet Yellen has said could happen as early as June 1.
After three face-to-face meetings, US President Joe Biden and House Speaker (and Republican leader in these talks) Kevin McCarthy expressed optimism about a possible increase in the national debt limit by the deadline Yellen spoke of.
As many economists, including Sarah House of the US financial firm Wells Fargo, have argued, “you don’t have to default on de facto debt to really hurt the economy.”
Anna Wong, chief U.S. economist at Bloomberg Economics, models a scenario in which prolonged anxiety leads to market turmoil and the U.S. Treasury is forced to cut welfare spending to prioritize debt repayment.
According to conservative estimates of the expert team, in this case, the GDP of the country on an annual basis may decrease by 8% in the second half of 2023.
During times of conflict, recessions and pandemics, Americans have benefited from the fact that long-term US Treasuries have been pretty close to risk-free assets.
Thanks to this, the government could often finance itself at a lower cost than other countries. Demand for these securities supports a $24 trillion market that is the deepest and most liquid in the world. Long-term US Treasuries are also the backbone of the global financial transaction network.
Even if a last-minute deal averts a default, America’s reputation as a debt-paying nation could be damaged, with consequences lasting months or even years into the future.
In a recent auction of four-week Treasury bills (the Treasury’s shortest-maturity benchmark), buyers asked for a record yield of 5.84%, the highest for any Treasury bill since 2000.
The potential failure of Congress to act in time is not the only act of self-sabotage that raises doubts about whether the US should remain at the center of the global financial system.
The Fed’s failure to address obvious risks, such as the pending bankruptcy of Silicon Valley Bank and Signature Bank, raises questions about its oversight capabilities, Bloomberg said.
Mark Sobel, who previously led US monetary policy at the Treasury Department, noted that repeated “oversight and regulatory failures will undermine the world’s confidence in the Fed and reduce the dollar’s long-term appeal.”
Struggling with high interest rates above the borrowing limit could also have implications for US security. Director of National Intelligence Avril Haynes warned on May 4 that a default would create “global uncertainty” about the value of the dollar, US leadership and US institutions.
Marcus Noland, executive vice president of the Peterson Institute for International Economics, believes China will seize the opportunity to present itself as a “soft, reliable leader” as opposed to an “untrustworthy hegemon” to expand its influence.
Joe Biden has already demonstrated how the debt ceiling drama is forcing America off the world stage: The US president canceled planned stops in Australia and Papua New Guinea after traveling to Japan this week for the G7 meeting to quickly return to Washington for talks with Republicans.
The change in schedule means Joe Biden will miss a key opportunity to meet Pacific leaders in Port Moresby. The decision, according to Bloomberg, threatens to undermine US efforts to strengthen ties in the Pacific region in an effort to counter Chinese influence.
It is not just America’s rivals who are outraged by Washington’s apparent disregard for the collateral damage that US policy is causing. Allies, even more than rivals, bore the brunt of the Fed’s rate hikes, which, by boosting the dollar against their own currencies, forced their central banks to reciprocate.
For example, Philippine Central Bank Governor Felipe Medala noted during a workshop at the IMF’s spring meetings in April that after World War II, the United States used its influence and economic power to create a global financial system in its own way, and countries such as The Philippines is paying the price for this.
Congressional Budget Office economist Daniel Fried noted in a working paper published in April that a conflict or financial crisis could be enough to topple one of the world’s dominant currencies in favor of another once the second country’s economy outstrips the other .
This is how the Dutch florin eventually gave way to the British pound sterling, which dominated the 19th century, and then the pound itself gave way to the dollar after World War II.
A March 2022 report by economists at Goldman Sachs also lists several parallels between the pound sterling in the early 20th century and the dollar today.
Among them: a small share in the volume of world trade compared to the currency’s predominance in international payments; deterioration of the net foreign asset position, which is largely a consequence of the growing debt burden; and potentially adverse geopolitics. Investment bank experts also noted at the time that “maintaining the status of the dominant reserve currency of the dollar depends primarily on US policy.”
Translation: SM
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