The core of US hegemony is the role of the US dollar as the only world-wide acceptable means of payment. But China would like to supplant the dollar, and the US Congress can make it easy for them — by its inaction.
If Congress fails to modify the existing Federal debt ceiling, sometime in October the Treasury will exhaust its capacity to meet its obligations when due, including its obligations to foreign holders of US securities. The likely consequences of failure to pay when due include a swing in perceptions of US securities from “no-risk” to low-risk. This would result in a rate increase of at least 0.5%, which on a debt of $27 trillion would amount to about $135 billion a year.
In addition, the failure to pay on existing debt will create an enormous incentive to find other world reserve currencies. This has already begun with the growing use of bitcoin.
So far the spread of bitcoin has been limited to small countries such as El Salvador, countries subject to sanctions on dollar use such as Venezuela and Iran, and countries facing high rates of domestic inflation such as Nigeria. The list may soon include the Ukraine.
Other crypto currencies have also emerged or are planned, including “Libra” by Facebook that could have a major impact because of its world-wide reach, and “DCEP” planned by China. One purpose of DCEP, in the words of the central bank, is to become “a global, super-sovereign currency.” The Chinese are surely smacking their lips at the prospect that their objective will be facilitated by Congressional inaction on the debt ceiling.
While raising the ceiling will prevent a catastrophe now, a new higher ceiling merely kicks the can down the road. The process of waiting until the 11th hour to take the action needed to avert catastrophe has been going on for years. In 1995 when the issue arose, I published a letter in the New York Times stating that a failure to raise the debt ceiling would create “consequences [that] last forever.” That threat remains today, and can be eliminated only by scrapping the debt ceiling once and for all.
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Thanks to Misha Guttentag for insightful comments.